Gasoline moves as EPA blinks on ethanol mandates

In a high stakes game of chicken between the renewable fuel industry, the refining industry and the Environmental Protection Agency, it appear that the EPA just made a turn before hitting the brick blendwall. RBOB futures (NYMEX:RBU13) took a hit on the rumors and bounced back on the fact. This comes against a backdrop of the new Iranian President calling for swift nuclear talks and a Fed that is trying to prepare us for the great taper.

Well it got to the point where even the ethanol industry knew something had to be done and the EPA did it! Well kind of anyway. While the final 2013 overall volumes and standards still require 16.55 billion gallons of renewable fuels to be blended into the U.S. fuel supply. The EPA is also providing greater lead time and flexibility in complying with the 2013 volume requirements by extending the deadline to comply with the 2013 standards by four months, to June 30, 2014. Those extra four months can stabilize the RIN market as refiners being forced to mix more ethanol into less gallons of gas would have sent RIN prices and pump prices soaring.

At the same time, EPA received comments from a number of stakeholders concerning the "E10 blend wall." Projected to occur in 2014, the "E10 blend wall" refers to the difficulty in incorporating ethanol into the fuel supply at volumes exceeding those achieved by the sale of nearly all gasoline as E10. Most gasoline sold in the U.S. today is E10. In the rule issued today, EPA is announcing that it will propose to use flexibilities in the RFS statute to reduce both the advanced biofuel and total renewable volumes in the forthcoming 2014 RFS volume requirement proposal. Is this a cause for celebration? Robert Campbell of Reuters says no. He says "Hardly anyone will be truly happy with this decision. The agricultural lobby will be dismayed by the tacit abandonment of the effort to dump ever more corn into the nation's fuel mix."

Those merchant oil refiners who do not blend their own fuel such as Valero or CVR Refining are still on the hook to buy up as many ethanol blending credits, known as RINs, as they were before. The firms that profit from this set up — the traders and hedge funds that have been speculating on RINs as well as companies like oil major BP that blend more gasoline than they import and manufacture — will still be winners from this flawed system, but even they must be wondering if it would be preferable to have a clear legal regime rather than an endless series of ad hoc fixes. So what have the regulators done? They've thrown a bone to the losers in this trade in the form of an extended compliance deadline and a reduction of the unworkable advanced biofuels requirement that will ease the pressure on buyers for 2013.

But, say you are a trader at one of the firms short RINs. How would you trade for 2014? Would you slow purchases in the hope that the Environmental Protection Agency's 2014 RINs rules are flexible enough to keep your requirements under control? Or do you instead keep buying to try and hoard 2013 RINs?  In essence all the EPA has done is admit that the Renewable Fuel Standard is irretrievably broken without offering a fix. And to be fair it is outside of the EPA's duties to fix the Renewable Fuels Standard (RFS) which is, after all, an act of Congress. No wonder it is called RINSANITY!

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