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By Liz Hampton, Energy Editor 

Welcome to Power Up. There’s been a lot in the news about diesel markets of late – in particular softening demand and the hit refiners are taking to margins as a result. Today we’re going to dig into renewable diesel and look at the oversupply facing that market, as well as what that means for the budding industry and the impact that’s having on traditional diesel markets. Let’s dive in!

Braya Renewable Fuels began producing renewable diesel at its Come By Chance, Newfoundland and Labrador, Canada, facility in February of this year. Braya Renewable Fuels/Handout via REUTERS

Renewable diesel has gained a lot of traction since the pandemic, as some traditional U.S. petroleum refiners have converted their facilities to produce the biofuel. Renewable diesel and biodiesel are both produced from biomass like cooking or vegetable oils; however, renewable diesel is a complete substitute for diesel, giving it a competitive edge. 

Both are more expensive to make than petroleum-based diesel and their markets are supported by government blending mandates from the Renewable Fuels Standards (RFS) program and tax credits. 

Overall, U.S. production capacity for renewable diesel has nearly quadrupled to 3 billion gallons, up from just 791 million annually in 2021. Phillips 66 is currently making 30,000 barrels per day (bpd) of the fuel at its recently converted Rodeo refinery in California, while Braya Renewable Fuels in February began production at its Come by Chance refinery in Newfoundland and Labrador, Canada.

As it stands, current capacity for both biodiesel and renewable diesel is at 5 billion gallons annually, sharply higher than blending targets set through the RFS, which stand at around 4.5 billion gallons through next year. 

The jump in supply has slashed the value of credits refiners earn under the RFS for producing or importing biofuels. D4 Renewable Identification Numbers (RINs) – those tied to biodiesel and renewable diesel – earlier this year fell below 40 cents a gallon, their lowest since 2019. They are currently around 44.50 cents, down from an average of $1.50 last year.

This is also hitting refining margins and prompting some companies to shutter facilities. Valero saw a 21% year-on-year decline in margins for renewable diesel, while Vertex Energy  last week said it would convert a small renewable diesel facility in Alabama back to fossil fuel production. Chevron recently shuttered two biodiesel plants due to unfavorable market conditions. 

The growing supply of renewable and biodiesel is also displacing a growing amount of petroleum-based diesel. Product-supplied of distillate fuel oil – a proxy for demand – fell to 3.9 million bpd in February of this year, down from 4 million bpd the same time last year. That, however, was offset by an increase in supply of biodiesel and other renewable fuels which rose to 300,000 bpd, from 200,000 bpd a year earlier, according to U.S. government data. 

More recently, petroleum-based diesel markets have faced their own problems, with softer demand and higher supply also hitting margins for refiners. The crack spread for diesel fell to a two-year low of $20 a barrel in April, down from $40 two months earlier. 

The four-week average demand for distillate fuels – which includes diesel and heating oil – was at its weakest level since the pandemic last week, according to U.S. government data, while inventories are at their highest seasonal level in three years. 

The Panama Canal has been in talks with U.S. LNG producers on how to meet increasing demand for crossings as it recovers from a prolonged drought that hit transits last year. The Canal is a key passage way for LNG cargoes to Asia. 

Canadian pipeline operator Pembina Pipeline last week played down its interest in investing in the newly expanded Trans Mountain oil pipeline (TMX) amid uncertainty around shipping tolls. Ottawa plans to launch a divestment process for the line later this year, and Pembina had formed a partnership with an Indigenous organization in 2021 to purse buying a stake in the line. 

The Organization of the Petroleum Exporting Countries will no longer publish a calculation of the world’s demand for its own crude in its monthly report, but rather focus on demand from the wider OPEC+ group. This comes as the broader group, which includes 12 OPEC and 10 non-OPEC members, including Russia, has become more relevant.  

The United States and China discussed overcapacity in the Chinese solar and battery manufacturing, steel production and coal power during two days of bilateral meetings on climate change last week. This comes amid concerns of China flooding global markets with cheap solar panels and coal that undercuts clean energy manufacturing in other countries. 

The United States extended a license that will allow certain transactions with Venezuelan state oil company PDVSA, enabling U.S. service companies to maintain assets after Washington reimposed sanctions on the South American nation last month. The license covers service firms Halliburton, SLB, Baker Hughes and Weatherford. 

We hope you’re enjoying the Power Up newsletter. We’d love to hear your thoughts and feedback. You can reach us at: powerup@thomsonreuters.com. 

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