By Nicole Jao and Siddharth Cavale
NEW YORK, May 15 (Reuters) - U.S. oil refiners are finally reaping profits from renewable fuels, which had squeezed margins for years, but now demand has surged thanks to recent government biofuel mandates and rising diesel prices driven by the U.S.-Israeli war on Iran.
In late March, the U.S. Environmental Protection Agency mandated that refiners blend record volumes of biofuels into gasoline and diesel this year and next. The plan includes a 60% increase in the use
of biodiesel and renewable diesel, along with a long-standing requirement to mix about 15 billion gallons of ethanol into gasoline each year.
These mandates have pushed U.S. refiners to ramp up biofuels output, reviving profits at a time when global diesel supplies remain tight. This follows a downturn when demand for renewable fuel fell short, oversupply weighed on margins and producers were forced to absorb the hit after rapid expansion five years ago.
Valero, the nation's biggest biofuel producer, saw its renewable diesel business swing to a $139 million profit in the first quarter from a $141 million loss in the same period last year. Profits for its ethanol business more than quadrupled. Executives at the company have said biofuel mandates provided a "pretty strong tailwind."
Refiner HF Sinclair's renewable diesel results also swung; it posted a $133 million profit after a $17 million loss a year earlier.
Phillips 66, one of the largest independent refiners, sharply narrowed losses in its renewable fuels division. The company's renewable diesel plants are running above capacity, Brian Mandell, executive vice president of marketing and commercial, said during an analyst call last month. Investors should expect a "substantial difference" in renewable segment performance from a year ago, he said.
UNEXPECTED WINDFALL
The new biofuel mandates effectively put a floor under biomass-based diesel demand, said John Deal, managing director of capital markets at Post Oak Group.
The new rules are helping drive up the price that refiners can get for tradable Renewable Identification Numbers (RINs). Refiners who blend more biofuel than they are required to can sell these credits to others that lack the capacity to blend enough biofuel themselves.
"The new record mandates bring multi-year certainty and stronger RINs," Rand Taylor, CEO of Fuel Ox Inc, a supplier of fuel additives to the refinery industry, said.
RIN credits are divided into different types, including D4 credits for biodiesel and renewable diesel and D6 credits for corn-based ethanol. Prices for these credits have surged more than 80% this year to over $2 each, according to LSEG data.
"We've waited through the hard times. Let's go harvest these good times," HF Sinclair's CEO Franklin Myers told investors earlier this month.
OUTLOOK UNCERTAIN
While stronger demand for renewable fuels and favorable policy signals have encouraged refiners to churn out more products, it remains unclear whether this will prompt producers to commit capital to expanding production capacity after several ventures have failed to break into this market.
In 2024, Chevron idled two biodiesel production facilities in the U.S. Midwest due to poor market conditions. In the same year, Vertex Energy paused renewable diesel production at its refinery in Mobile, Alabama, to pivot back to traditional fossil fuels.
Strong demand by biofuel producers for feedstocks, particularly soybean oil, and a slowdown in soy crushing capacity because of spring maintenance could push soybean prices higher. Higher prices and short supply could discourage biodiesel and renewable diesel production, traders and analysts said.
Also, diesel prices have spiked during the Iran war, which could push some refiners to maximize conventional diesel production instead. The war has boosted diesel prices 46%, and with supplies tight, conventional diesel output offers stronger returns in the short term, making it more attractive than expanding renewable diesel production, said Arif Gasilov, a partner at sustainability and ESG consulting firm Gasilov Group.
“Whether this proves to be a sustained shift or a temporary spike will depend on how these variables evolve over time,” said Geoff Moody, senior vice president of government relations and policy at the American Fuel and Petrochemical Manufacturers.
(Reporting by Nicole Jao and Siddharth Cavale in New York; Editing by David Gregorio)
