OREANDA-NEWS. The EPA's proposed Renewable Volume Obligations (RVO) proposal is largely viewed as a win for the US biodiesel industry, although an expected supply glut may hurt US producers in the second half of the year.

In the RVO released in May the EPA opted to increase the biodiesel mandate to reflect actual 2014 usage at 1.63bn USG. The mandate is set to increase to 1.7bn USG for 2015 and by 100mn USG each year thereafter. Biomass-based diesel RINs were strongly supported by the proposal, while renewable fuel RINs softened as traders eyed a 2015 conventional ethanol requirement of just 13.4bn USG alongside an impressive rebound in gasoline demand.

Rising expectations of a reinstatement of the biodiesel tax credit (BTC) weighed heavily on biodiesel RINs shortly after the release of the EPA mandates triggered a rally. The $1/USG credit has been applied in four of the past five years since 2010 and would vastly improve economics for blenders and pressure prices for RINs as an alternative to producing the fuel.

Biodiesel markets also turned bearish because of an anticipated supply glut from imports of Argentine biodiesel, which the EPA approved as qualified for RIN certification in January. At this time seven of that country's 35 plants qualify for RIN generation.

Physical ethanol markets collapsed to a five-year low at the start of 2015, pressured by record production levels and low crude prices. Spot values steadily rose through mid-May alongside higher corn prices, a pullback in production levels and the return of spotty export demand. Market direction reversed course over the following month as output picked up, but stronger corn futures have lent support to physical ethanol hubs since mid-June.

Expect retreating corn prices and increased competition from Brazil in the export arena this summer to develop a contango structure in ethanol markets.

RIN markets in the first half of 2015 were primarily impacted by regulatory developments, namely the expiration of the BTC and the EPA's RFS proposal. In January, RINs surged to 1.5-year highs, as the removal of the tax incentive for blending biodiesel prompted increased demand for biodiesel credits, supporting the overall RIN market. Following the announcement of the EPA's RFS proposals in late May, D6 values plummeted to 37.75?/RIN, a 1.5-year low, as the EPA confirmed the market's suspicions of lower requirements for conventional ethanol, while D4 credits received initially strong support, reaching 95?/RIN, before tailing off by mid-year.

The restoration of the BTC will pressure RIN markets further and promote further imports from Argentina. RVO prices could reach the low 4?/USG range should the BTC be reinstated. Low crude prices will continue to pressure biofuels particularly following the Iran deal. Late November will prove critical to the marketplace as the EPA finalizes its 2014 RVO and perhaps updates its guidance for 2015-2016.