Energy & Energy Transition

Next-Gen Fuels at a Crossroads: Second Edition

By: Jason Gabelman, John Miller, Tom Fitzgerald CFA

Oct. 22, 2024 - 3 minutes

A worker in a high-visibility jacket inspecting and recording details of a large number of oil barrels.

Overview:

Biomass-based distillate market overall weakness might continue through 2026.
Margin improvement could happen in waste oil-based renewable diesel and sustainable aviation fuel.
We look into the current status of regional government standardization and incentive programs.

The TD Cowen Insight

We forecast the expected biomass-based distillate market weakness in 2024 to continue through 2025, 2026 and potentially beyond. Vegetable oil-based margins should weaken while waste oil-based renewable diesel could be flat in 2025 and stronger in 2026. We have confidence in U.S. waste oil-based sustainable aviation fuel margin improvement from 2025. There are a number of uncertainties to our outlook that we detail in this note.

Global Biomass-Based Distillate Market Outlook

The global biomass-based distillate market has hit multi-year margin lows in 3Q24. Investors are mixed on timing and magnitude of a potential improvement. We expect oversupply to continue 2025 - 2026 resulting in lower margins for vegetable oil-based producers versus current levels. Waste oil based renewable diesel margins should maintain current relatively weak levels in 2025 with some improvement in 2026, though this is dependent on the U.S. Clean Fuel Producer Credit (i.e., 45Z) allowing international feedstocks. Waste oil-based U.S. sustainable aviation fuel has the best chance of material margin accretion.

Unique Multi-Regional Global View

We update our multi-regional supply and demand balances that provide a unique global view on the biomass-based distillate market including biodiesel, renewable diesel and sustainable aviation fuel. This includes our proprietary project-tracker. It also includes California's Low Carbon Fuel Standard (LCFS) program incorporating expected amendments, other state LCFS programs, Canada's LCFS program, the U.S. Renewable Fuel Standard (RFS) program and EU's Renewable Energy Directive (RED III) that underpins its biofuel mandates.

U.S. vs Europe Premiums

We forecast U.S. will need to disincentivize ~0.8 billion gallons of biodiesel between now and 2026. Generic biodiesel margins could fall to -US$0.40 per gallon. We estimate vegetable oil-based renewable diesel and sustainable aviation fuel margins in 2025 at US$0.10 per gallon and 2026 at US$0.20 per gallon. Waste oil-based renewable diesel should earn US$0.40 per gallon premium over vegetable oil-based product in 2025 and US$0.55 in 2026. For context, peer-leaders are currently earning ~US$0.50 per gallon. U.S. sustainable aviation fuel from waste oil should earn US$1.3/gallon premium to vegetable oil-based sustainable aviation fuel; it is unclear if Europe will command a similar premium.

Canada a Growing Importer of BBD

There is near-term risk for U.S. renewable diesel margins as global producers could increase imports into year-end 2024 ahead of expiry of a U.S. tax credit. California should finalize its LCFS program later this year and implement early 2025, which should support LCFS prices. The U.S. Treasury could release draft text for 45Z late 2024 though final rule may not come until 2026.

The U.S. Environmental Protection Agency releases Renewable Identification Numbers data monthly, and the speed at which oversupply builds will weigh on margins. Canada will continue to release data on its own Clean Fuel Standard program which could help calibrate supply and demand as a growing importer of biomass-based distillate. Several producers will introduce sustainable aviation fuels to markets in 2025 providing indications for margin premiums over renewable diesel.

Subscribing clients can read the full report, Next-Gen Fuels At A Crossroads: Second Edition - Ahead Of The Curve Series, on the TD One Portal

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Jason Gabelman

Director, Sustainability & Energy Transition – Next Generation Fuels and Energy – Integrated Oil, Refining & Marketing, Liquefied Natural Gas (LNG) Research Analyst, TD Cowen

Jason Gabelman
Director, Sustainability & Energy Transition – Next Generation Fuels and Energy – Integrated Oil, Refining & Marketing, Liquefied Natural Gas (LNG) Research Analyst, TD Cowen

Biography

Jason Gabelman is a Director at TD Cowen, covering Sustainability & Energy Transition – Next Generation Fuels and Energy – Integrated Oil, Refining & Marketing, Liquefied Natural Gas (LNG) sectors. Mr. Gabelman joined TD Cowen in 2013 as a research associate for the refining & marketing team. He supported team growth into new coverage verticals such as integrated oil and LNG. Mr. Gabelman also spearheaded expansion of TD Cowen’s Energy & Materials Strategy product, marrying TD Cowen’s data science initiative with energy market analysis. He previously worked for BP’s U.S. Refining and Marketing segment, where he held a variety of commercial roles in finance, strategy, and refinery operations.

Mr. Gabelman earned a bachelor’s degree in business administration from the University of Michigan in 2010.

John Miller

Managing Director, Washington Research Group - ESG and Sustainability Policy Analyst, TD Cowen

John Miller
Managing Director, Washington Research Group - ESG and Sustainability Policy Analyst, TD Cowen

Biography

John Miller joined TD Cowen Washington Research Group in September 2021 and covers ESG and sustainability policy. TD Cowen Washington Research Group was recently named #1 in the Institutional Investor Washington Strategy category. The team has been consistently ranked among the top macro policy teams for the past decade. Mr. Miller previously served as a vice president and senior ESG research analyst at Calvert Research and Management, part of Morgan Stanley Investment Management, where he developed and built a quantitative, company-level ESG risk/reward assessment framework targeted towards the global energy and utility sectors. Mr. Miller supported the index development and security selection process for Calvert’s Global Energy Solutions Fund and Global Water Fund. Mr. Miller also worked at the U.S. Federal Energy Regulatory Commission (FERC) as branch chief in the Office of Enforcement, Division of Analytics and Surveillance. Earlier, he served as Technical and Policy Advisor to a FERC commissioner and as an energy analyst in FERC’s Office of Enforcement.

Mr. Miller holds a B.A. in economic history and political science from The George Washington University, and a Master’s in global history from The London School of Economics and Political Science, where he focused on developmental economics. John also holds the Fundamentals of Sustainability Accounting certification, which is granted by the Sustainability Accounting Standards Board (SASB).

Material prepared by the TD Cowen Washington Research Group is intended as commentary on political, economic, or market conditions and is not intended as a research report as defined by applicable regulation.