2016 Market Preview: Biodiesel and Ethanol

What to expect with regard to the biodiesel tax credit and ethanol production in 2016.
President Obama in late 2015 signed into law a $622 billion tax package that includes a two year extension of the $1/gal biodiesel and renewable diesel tax credit (retroactive to the beginning of 2015, through 2016). Both had expired at the end of 2016. (NOTE: Claims for 2015 gallons cannot be made until the IRS issues revised Forms 8849 and 720. These forms will be ready in the coming weeks. Blenders should not file credit claims on current forms, but rather wait until these forms are revised. NATSO will inform its membership when the forms are updated.)
Thanks in large part to NATSO's advocacy efforts, the package did not include language that would shift the biodiesel tax credit from blenders to producers. Biodiesel producers are expected to resume efforts to convince Congress to change the credit this year, which NATSO will continue to oppose.

At the present time, it is uncertain how seriously Congress will consider changes to the biodiesel tax credit -- or whether the credit will be extended at all after 2016. Congress's conduct this year will be a key to the market's trading dynamics in 2016.
For the time being, the blenders credit will facilitate additional imports hitting the coastal markets, which -- along with EPA's Renewable Fuel Standard numbers for 2016 calling for a significant increase to biodiesel blending -- will likely generate a robust biodiesel demand for most of the year.  Over the past two years, there have been substantial imports from Southeast Asia and Argentina, which has changed the supply landscape favorably for blenders (and consumers).
"The direction of crude oil prices also will play a significant role, not only on biodiesel production and price but the entire value chain, as Renewable Identification Numbers (RINs) will have to incentivize blending biodiesel sufficiently to meet the EPA's RFS mandates. EPA set the 2014 Renewable Volume Obligation (RV) at 1.63 billion gallons, rising to 1.9 billion gallons in 2016 and 2 billion gallons in 2017.

2016 will likely be a repeat of 2015 for the ethanol markets. Production is widely expected to come close to 2015 levels, potentially with a slight gain.  In its December forecast, the U.S. Energy Information Administration (EIA) put the 2016 outlook at an average of 960,000 barrels/day, or 14.717 billion gallons annually.
EPA's RFS RVOs indicated that 14.5 billion gallons of ethanol will be needed domestically for fuel blending in 2016, 3.57 percent above what the agency had preliminarily proposed last summer. Any gap between domestic ethanol use and the 14.5 billion gallon requirement would have to be reconciled by blending more advanced biofuels (such as biodiesel), additional carry-over RINs from 2015, or higher ethanol blending such as E15 or E85 (which is not expanded to appreciably expand its mart share in the near-term).
Two other key factors that will likely remain stable in 2016 are access to ethanol export markets and feedstock corn prices. Most market-watchers believe exports will not reach more than the total expected to be exported in 2015.

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