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Strong LCFS gears up for center stage in 2016 US biofuel economics

Activity in the California LCFS credits market remained slow on Monday amid a dearth of fresh bid and offer interests. Best indicative bids walked down to $95, leaving PRIMA’s LCFS Index closing at $97.50. In November to date, PRIMA has confirmed 50,000t of credits traded. Of this, 41,000t changed hands in a narrow range between $97 and $98.

The rapid ascent of LCFS credit prices will play a crucial role in US biofuel arbitrage economics for 2016. Brazilian sugarcane ethanol is showing a heavily inverted market structure as the high intercrop prices of around $2.05/gal give way to new crop domestic anhydrous levels of around $1.73/gal. The inverse in high CI Midwest corn ethanol is far less dramatic, with nearby mid-market values for product destined for north California pricing around $1.60/gal compared to second quarter Chi Platts levels of around $1.48/gal. With the D5/D6 RIN spread nudging back above 16 cents/gal on Monday, CARB-qualified sugarcane ethanol imports currently undercut Midwest ethanol into California for the new Brazilian crop (see table below) given similar freight differentials.

Weak crude oil prices meanwhile have continued to underpin strong midcontinent biodiesel premiums to heating oil in the high-80s cents/gal for prompt barrels. D4 RINs fetched 62 cents/gal on Monday, with California offering an additional near 17 cents/gal LCFS bonus for generic Midwest SME.

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