Refiners' and petroleum marketers' hopes for a quick rollback of the US ethanol mandate by the Trump administration have fizzled out, causing renewable fuel credits to rebound after four months of steep drops.
Since President Donald Trump started shaping his cabinet in early December, traders have pounced on any shred of news hinting how he might handle the Renewable Fuel Standard -- with many of them interpreting each development as a sign the biofuels mandate would be gutted.
But now Washington policy watchers see those chances as overblown, with the RFS nowhere near the top of the administration's priorities and given the need for Congress to take action to alter the policy in any significant way.
"The regulatory outlook has been driving the RIN price recovery," said Scott Irwin, a University of Illinois agriculture professor, referring to renewable identification numbers. "The RINs market, grain market and stock market all priced in way too high of odds that the Trump administration would quickly make changes to the RFS." Stephen Brown, refiner Tesoro's chief lobbyist, said nothing fundamentally changed in the ethanol or RINs markets to explain the level of volatility over the past four months other than an "overreaction to perceived news." He said activist investor Carl Icahn is the only Trump adviser who considers RFS reform a top priority right now.
"I think he's being driven a little bit back under the rock," Brown said.
"I think he understands that maybe he got a little bit over his skis." Icahn and EPA have not responded to multiple recent requests for comment from S&P Global Platts.
FOUR-MONTH PRICE SLIDE
Ethanol RINs for 2017 compliance peaked at $1.075/RIN on December 2, nine days after the Environmental Protection Agency under the Obama administration set mandatory blending volumes for this year.
A week later, ethanol RINs took a dive to 83 cents/RIN on reports of RFS critic Scott Pruitt's nomination to lead the Environmental Protection Agency. They recovered briefly but fell again when the Trump transition team announced December 21 that Icahn would serve as a White House special adviser on regulatory reform.
They started sinking again after Pruitt's Senate confirmation hearing on January 18, even though he struck a moderate tone to appease farm state senators with major ethanol producers in their districts.
RINs fell further in late January when the White House paused the effective dates of a slew of regulations, including the 2017 blending mandates. The 60-day delay came and went without any changes to the RFS.
The final sharp drop started February 27, when news emerged of a deal between Icahn and the Renewable Fuels Association, a major ethanol trade group, to support changing the RFS point of obligation from refiners and importers to blenders at the wholesale rack.
Ethanol RINs hit a low of 33.75 cents/RIN on March 2 but have recovered to 57 cents/RIN as of Tuesday, according to S&P Global Platts assessments.
A biofuels analyst said negative press attention surrounding Icahn's personal stake in changing the RFS point of obligation -- as majority owner of refiner CVR Energy -- likely forced him to stop pushing the issue so aggressively.
"In any case, this is a narrow issue at a time when the White House has other things on its mind," the analyst said.
REFORM STILL POSSIBLE
Irwin said RINs volatility in recent months reflected Trump's mixed messages on biofuels so far.
"Trump is a friend of ethanol who hired Pruitt and Icahn," he said. "The market is having a hard time understanding how Trump can send such contradictory signals." Rob Underwood, president of the Petroleum Marketers Association of America, thinks RFS reform is still in the cards. But it remains to be seen whether it will come from Congress passing a comprehensive rewrite -- which he thinks will be harder -- or EPA using its waiver authority to lower the annual volume mandates.
Underwood said he would like to see EPA lower the conventional ethanol mandate to 9.7% of the gasoline pool for the already-underway 2017 mandate.
But he thinks this is more realistic for the 2018 mandate, which must be finalized by November 30.
The 2017 policy requires blending 15 billion gallons of conventional ethanol, with the total renewable fuel volume representing 10.7% of the US transportation fuel pool.
"If they continue to raise the mandate, that would possibly force higher ethanol blends on folks that don't have the ability to handle them," he said.
Irwin predicts EPA will hold the ethanol volume at 15 billion gallons for 2018.
2019 CHANGES MAY BE MORE LIKELY
Tesoro's Brown said any lowering of the mandate by the Trump administration might not come until the 2019 mandate, which will be announced in November 2018.
He said that's because EPA is likely nearing completion of the 2018 levels, which the agency will need to send to the White House's Office of Management and Budget in late April before publishing as a proposed rule in late May or June.
"Nothing is happening on the point of obligation and nothing will.
Legislatively, I don't see the path forward yet," Brown said, while acknowledging that many RFS critics on Capitol Hill continue to engage on the issue.
Representative John Shimkus, Republican-Illinois, for example, continues to remind stakeholders that EPA will assume full control of the RFS program in 2022 barring new legislation, spokesman Jordan Haverly said.
"He believes that uncertainty should help bring all sides of this debate to the table...and his ultimate goal is freeing up the market, getting away from the mandate and letting competition fill the void," Haverly said.
For his part, Pruitt has neither expressed support for biofuels nor repeated his pre-nomination distaste for the RFS since taking the top job at EPA.
Pruitt generally sticks to a tight script that emphasizes the need for EPA to stay within the authority Congress grants it -- which could indicate an unwillingness to make major RFS changes through an agency rulemaking rather than at the direction of new legislation.
"The past administration just made it up," Pruitt said of environmental regulations on Fox News Sunday. "They re-imagined authority on a statute. There's a commitment with the new administration to have a pro-growth, pro-environment approach to these issues, but also to respect rule of law."
