Chevron and Neste are Reporting Upsets on Renewable Diesel

Energy markets are trading modestly higher for a 2nd straight day to start the week, but those gains have only erased a small fraction of last week’s heavy losses so far. While energy and equity markets have not had a strong correlation most of the year, signs of potential peaking in stocks may also be acting as a headwind on risk taking in other asset classes this week.

While the world anxiously awaits Israel’s promised attack on Iran, a new controversy is swirling over leaked documents on the US assessment of those attacks. Given that Israel has a tendency to go its own way, and the US apparently couldn’t handle a shared secret, it wouldn’t be a shock if suddenly Iran’s energy infrastructure gets put back on the table after prior assurances to the contrary. Meanwhile, the fighting in Lebanon and Gaza shows no signs of slowing, with the rapid reduction in shipments through the Red Sea the most directly impact on supply chains from those wars.

Chevron reported unplanned flaring at its El Segundo CA refinery overnight with no further information on the cause or duration of the upset. Reports have been circulating over the past week that the company had stopped making Renewable Diesel at that facility temporarily due to weak economics, switching back to traditional diesel production, which shows the advantage those who opted to co-processing at their facilities have vs those that converted or built from scratch.

In addition, Neste has reported an upset at its Singapore Renewable Diesel refinery that has severely limited operations and reduced imports into the West Coast that many had been betting would be heavy in Q4 as the company raced to take advantage of the $1/gallon blenders tax credit before it expires at year end. Valero had already announced plans to begin converting up to half of its RD capacity at the Diamond Green Pt Arthur facility to SAF production starting this quarter which takes even more barrels out of the RD market. That sudden drop from numerous suppliers has made RD suddenly very hard to come by after producers were swimming in excess product on the West Coast for most of the year. To put it in perspective, in early 2024 RD was trading for 50 cent discounts to traditional diesel grades plus fees, and this week there are reports that same product is trading at a premium to traditional diesel.

The new incentives under the Clean Fuel Production Credit will continue to incentivize producers with the capabilities to produce SAF instead of RD, and last week the DOE announced billions in loan guarantees to help 2 facilities in Montana and South Dakota expand their SAF capacity. It’s also worth noting that the CFPC appears to allow producers to export their SAF, so they can double coupon the US government subsidies and the European 2% SAF mandate that begins in 2025.

Oil producers in the Gulf of Mexico were given 5 more months to work out details with the National Marine Fisheries Service (NMFS) on plans to protect the waters they hope to continue expanding production in.