Under the Environmental Protection Agency's (EPA) Renewable Fuel Standard (RFS), oil refiners are required to blend a certain amount of renewables, specifically biofuels like ethanol and biodiesel, into the gasoline, diesel, and jet fuel they produce. Refiners either have to blend to meet yearly renewable volume obligation (RVO) as mandated under the RFS, or buy tradable renewable fuel credits called RINs in the open market.
Refiners have been opposing this biofuels-blending mandate for years, but discontent within the industry has fired up lately for two reasons: The EPA hasn't fixed RVO for 2021 yet in the wake of the coronavirus, but prices of RINs shot up manifold in the past year or so as refiners have had to purchase RINs nonetheless based on 2020 RVO despite the broader slump in demand for fuel thanks to pandemic restrictions. That's eaten away into refiners' margins.
To make matters worse, refiners are now facing RIN shortage as higher RIN prices failed to boost ethanol production. Time and again, PBF Energy's management has called RFS a "broken program" and stressed the importance of addressing the shortfall in RINs. In fact, refiners are now even setting up their own renewable-energy fuel facilities to mitigate RFS costs. PBF Energy is evaluating converting an idle hydrocracking unit into a renewable diesel-fuel producing plant, and recently selected Honeywell for the project.
News coming out this morning, therefore, was bound to send PBF Energy shares higher.
The EPA is reportedly about to send its 2021 biofuels-blending draft for initial review to the White House, post which it can set up RVO mandate for 2021, according to the latest update from Bloomberg.
Thanks to high RIN costs and shrinking margins, several analysts have downgraded PBF Energy stock in the past couple of months. Now, even a small cut in the EPA's 2021 RVO mandate could boost the refiner's prospects, so you'd definitely want to keep an eye out on this one.