By Cezary Podkul
NEW YORK, Nov 7 (Reuters) – Swiss trading company Vitol SA
is among the biggest beneficiaries of an opaque
U.S.-government-mandated trading scheme established to help
boost the share of ethanol in the nation’s fuel supply, market
sources say.
As refiners scrambled this year to meet an expected steep
rise in the amount of ethanol that must be blended into
gasoline, trading in little-known credits used to enforce the
quotas turned white-knuckled. RINs, or renewable identification
numbers, have traded for years in a niche market for pennies
apiece. In mid-July they soared to nearly $1.45 from about 5
cents last December, providing huge opportunities for oil
traders and others in the market.
Oil refiners such as PBF Energy Inc railed against
the rally, blaming it on a flawed renewable fuels program and
rampant speculation. They said meeting next year’s ethanol
blending quota was impossible because they couldn’t sell fuel
with more than 10 percent ethanol without risking damage to car
engines or breaching warranties. This caused the surge in demand
for RINs. Refiners vowed to pass on nearly $2 billion in costs
to consumers through higher gasoline prices.
The winners have been less vocal, but brokers and traders
active in the loosely regulated market say that privately held
Vitol, the world’s largest trader of oil, appears to have done
especially well. That view is based on outside observations of
how the company traded in the over-the-counter market, as well
as its decade-long effort to build an unrivalled network of U.S.
ethanol blending terminals and overseas suppliers that gave it a
prime place in the RINs market.
Seven sources, including those at three major brokerages who
do direct business with Vitol, said it was a big buyer of RINs
early in the year before prices spiked. Several also said its
Houston-based trading team was a prominent seller as prices
climbed.
“They’re the success story of it all,” said one source who
trades with Vitol. Other market participants confirmed that the
company was among the largest traders they saw in the RINs
market, despite its owning no U.S. refineries or fuel stations.
They said they didn’t know if it had made money.
Vitol Chief Executive Ian Taylor, speaking at the Reuters
Commodities Summit this week, said RINs were a “notoriously
difficult animal.
“I wouldn’t say we got it particularly brilliantly right or
anything like that. You make an assessment of how many RINs are
available in the market and what the demand is going to be.
What you get right in 2013 you might have got wrong in 2012 or
for 2014.”
Spokeswoman Andrea Schlaepfer said Vitol “buys and sells
RINs on a regular basis” because it has its own biofuel blending
obligations to manage. She declined to comment on specific
trades or whether the company made a profit through its
activities. She said it had no traders dedicated solely to RINs
and did not consider itself one of the biggest participants in
the market.
For many observers, Vitol and other traders simply responded
early to a glitch in the regulations that threatened to cause a
shortage of credits next year. Such opportunism was perfectly
permissible. Vitol and others may have profited from the glitch,
but they did not cause it, experts say.
“They’re entrepreneurial, they’re skillful and they look at
the regulations and figure out how to make money,” said Philip
Verleger, an energy economist based in Colorado who testified
about the RINs market at a Commodity Futures Trading Commission
meeting this summer.
Still, Vitol’s apparent trading success will only add to the
fierce debate over the future of a controversial 2007 law aimed
at increasing the amount of ethanol in U.S. gasoline. It may
also stoke political scrutiny of the RINs market, which has been
this year’s wildest in the commodities world. Several lawmakers
have called on the CFTC to more closely examine the market.
BOXTOP CREDITS
RIN credits are simply a means of enforcing government
blending mandates.
Every gallon of ethanol manufactured in or imported into the
U.S. receives a 38-digit RIN that tracks its progress throughout
the fuel chain. Once a refiner buys the gallon and blends it
with gasoline, the RIN can be separated from the gallon and
presented to the Environmental Protection Agency as proof of
compliance with the mandate – akin to clipping a coupon from a
cereal box to show proof of purchase.
The RINs also allow companies such as wholesalers who
predominantly blend fuel but don’t import or refine any gasoline
to sell excess RINs to companies that need them in order to meet
EPA obligations.
In some respects, Vitol’s prominence is the result of years
of quietly positioning itself as a key player in the U.S.
renewable fuels markets. It was the country’s biggest importer
of ethanol last year as its shipments more than tripled, and has
long employed a unique arrangement importing Brazilian ethanol
via an El Salvador processing plant, according to U.S.
government data, an activity that can help it generate RINs.
In 2010 Vitol built a $130 million oil terminal on Florida’s
east coast and added a biofuel facility last year, giving it a
major foothold in the import-dependent state. It maintains
ethanol storage, supply and distribution facilities in all key
U.S. energy hubs, including New York Harbor, Chicago, Florida,
Houston, San Francisco and Los Angeles.
By 2010, when the EPA finalized its rules for RINs trading,
Vitol said in a brochure that it was “ideally placed” to ride
the expanding ethanol market; Vitol was developing a blending
program and looking for more opportunities in the business, it
said. At the time, the value of an ethanol RIN was negligible;
the credits traded at less than 5 cents for most of 2010 and
2011.
Whether Vitol’s ethanol blending and import activity offset
the regulatory obligations resulting from its gasoline imports
is unknown. (Gasoline importers, just like refiners, are
required to provide RINs to show their compliance.) Vitol has a
“significant and fluctuating” RIN obligation whose management
is the “primary driver” of its RIN trading, Schlaepfer said.
Nor is it clear to what extent Vitol engaged in speculative
trading. Market sources said its activities appeared consistent
with bets on rising prices in the early days of the rally, but
only Vitol knows for sure. As prices surged this year, such
trading likely “exacerbated” the rally, said Divya Reddy, energy
analyst at policy consulting firm Eurasia Group in Washington
DC.
Vitol said in a recent business brochure that trading in
other commodities – a group that includes renewable fuels and
RINs as well as metals, chemicals, carbon and coal – made up
less than 9 percent of its $303 billion in revenues last year.
It does not disclose profits.
Other companies that have made money from RINs include oil
giant BP Plc, which said in July that it was “able to
trade into this spike recently and have done quite well out of
it.” To a lesser extent, some banks and hedge funds have also
participated. Even a Missouri academic saw the potential for a
spike. (For a separate story on banks, see.)
The market for RINs is tiny compared to oil, but the
dramatic volatility offered scope for outsized returns. In June
and July, at the peak of the rally, at least 2 billion 2013
separated ethanol RINs were transacted, nearly two-thirds of the
total secondary market volume for the first seven months of the
year, according to a Reuters analysis of EPA transaction data.
That’s about $1 billion a month for the period, based on average
prices.
TROUBLE AHEAD
For many observers, the troubles stirring in the RIN market
were increasingly apparent toward the end of 2012.
The 2007 law that established the current RIN market called
for boosting ethanol to 15 billion gallons by 2015, an increase
that assumed steadily rising demand for gasoline that would keep
the ratio of ethanol to petroleum-based gasoline below 10
percent.
Instead, gasoline demand has fallen sharply. Without
measures to relax the rules, the quotas for 2014 threatened to
push gasoline supplies beyond the so-called blend wall – the 10
percent ethanol mix that refiners say is the maximum they can
sell.
Last December, Wyatt Thompson, an agricultural economist at
the University of Missouri, published a paper titled “A Question
Worth Billions: Why Isn’t the Conventional RIN Price Higher?” In
it, he predicted the price of RINs could soon increase more than
tenfold from levels near 5 cents a credit.
His predictions proved conservative. Between the end of
December and early March, RIN prices soared to nearly $1.05 each
from about 5 cents.
Panicked refiners jumped in to buy the credits before prices
moved even higher. As they did so, traders said they also saw
Vitol – which they said had been an avid buyer earlier in the
year – selling some credits. Three sources mentioned 60 cents as
one price.
Schlaepfer declined to comment on specific trades presented
by Reuters.
Whether Vitol fared as well while the RIN bubble deflated is
not clear. Prices tumbled after the EPA hinted in August that it
would use “flexibilities” in the 2007 law to reduce blending
quotas. An agency proposal leaked last month showed it suggested
a deep reduction in the ethanol mandate for 2014, causing a
further decline in prices to as low as 23 cents each – a price
not seen since late January. On Wednesday, RINs traded at about
30 cents each.
Schlaepfer said whether RINs rise or fall is of “limited
importance” to Vitol. “We are no better (or worse) off than any
other obligated party in the industry.”
Regardless of how Vitol made out, CEO Taylor said he saw
little future in the RINs market, whose fate now resides in
Washington: “Any business that is government-determined is not
particularly sustainable, in my view.”
