Shares of Renewable Energy Group (NASDAQ:REGI) rose over 12% last month, according to data provided by S&P Global Market Intelligence. There wasn't any company-specific news catalyzing the surge in January, although two things are worth noting. First, shares appear to have simply corrected course following a poor performance at the end of 2018.
Second, and more important, there's a strong correlation between the biodiesel stock's price and that of crude oil. That's because selling prices for biodiesel and renewable diesel are strongly linked to selling prices for their petrochemical counterpart. Additionally, Renewable Energy Group has sold increasing amounts of petroleum-based diesel in recent years, more closely linking its fate to diesel prices.
Renewable Energy Group has diversified its business in recent years by selling, transporting, and storing petroleum-based diesel within its nationwide distribution network. The business sold 82 million gallons of petroleum-based diesel worth $172 million in revenue in the first nine months of 2018, or 9.2% of total sales. It sold just 83 million gallons of the non-renewable fuel in all of 2017.
That helps to explain the strong correlation between the stock and crude oil prices observed last month:
That could turn out to be a great thing for investors. While Renewable Energy Group expects to continue a steady pace of upgrades at its biodiesel and renewable diesel facilities that will boost output and reduce per-gallon expenses, global diesel demand is set to soar in 2020. A new rule requiring low-sulfur fuels to be used by the global shipping industry goes into effect on the first day of next year.
Diesel is a much cleaner-burning fuel compared to the current standard, called bunker oil, which has analysts expecting diesel demand to surge by 12 billion to 30 billion gallons per year. That should keep diesel prices at healthy levels for quite some time as the planet's refinery base retools to meet demand.
Renewable Energy Group was chronically undervalued for years. Mr. Market finally began paying attention to the business in 2018, likely because it finally became profitable without any help from federal renewable fuel subsidies. That led to a nearly 118% gain for shares last year, although continued production growth and healthy diesel prices should allow the company to continue delivering growth for the foreseeable future.