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Dan Dicker

Dan Dicker

Dan Dicker is a 25 year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline and heating oil…

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Why Are Refiners Still Underperforming?

During this oil bust, one sub-sector of energy should have been raking it in – the refiners – and yet their stocks have remained relatively flat for 2016. Low oil prices, combined with an increase in gasoline demand as we have seen here this summer in the U.S. should have translated into big moves for Valero (VLO), Tesoro (TSO) and CVR Energy (CVR), but instead we've seen the refiners lag throughout most of the year.

We can isolate two reasons for this; A domestic glut that was slow in clearing and the cost of Ethanol credits. One of them – the glut - has been getting better, while the other is getting worse. And this continues to hold me back from getting excited about refining stocks going into 2017. Let's look at this big hurdle to independent refiners right now, the Ethanol credit (Or RIN) game.

President Bush signed the Ethanol and Biodiesel program into law, designed to make the US more energy self-sufficient. It outlined a minimum use of biofuels as a blend to gasoline, with a scheduling program that would ratchet up the percentage of Ethanol in motor fuels as time passed. We could talk about the misguided purpose of the law, because blending ethanol into gasoline does little to move this country towards energy independence, nor does it help at all, on balance, in emissions.

Instead, let's just talk about the program, which mandates an increase in the amount of ethanol (or other biofuels) that needed to be blended into gas every year. This is an immediate problem, because the program does not take into account how much gasoline is actually being refined. And as blending mandates continued to mechanically increase while gasoline production in the U.S. didn't grow much, refiners are looking at the forced blending of a mandated amount of biofuel that has outrun the supply of refined gasoline being produced.

How much has it outrun it? EPA mandates are currently at 10.5% of gasoline, above the auto makers recommended MAXIMUM of 10% of ethanol in order to keep engines running properly. In essence, the EPA is currently mandating you to use fuel that is bad for your car.

Of course, the refiners don't actually need to use all that ethanol, and they don't. They can, instead of actually blending ethanol into their gas, buy ethanol credits (RINs) that count towards the EPA program. The idea is that some refiners exceed their ethanol mandate and can sell the rest of their excess as credits for someone else who prefers…




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