What were the main drivers for demand for biofuel risk management products in 2016?
While mandated markets remain the backbone of the industry, the benefits of biofuels are becoming apparent to more discretionary blenders worldwide. Gasoline blenders see ethanol as an inexpensive oxygenate and octane booster despite low blend margins; this led the US to a record year of net ethanol exports. The continued growth of greenhouse gas (GHG) emissions targets in many jurisdictions is increasing demand for low GHG fuels. As these programmes tighten their compliance targets, waste-based products are moving to Europe and low carbon fuels to California, where these products garner as much as $1 per gallon compared with traditional biofuels. Conventional biofuels, however, satisfy the vast bulk of demand in most markets.
How did crude oil market fundamentals affect demand for risk management tools within the biofuels market in 2016?
Despite low oil prices, we saw growing demand for biofuels globally. Our clients in the developing markets have looked to us to connect them with liquid risk management tools in the US and Europe. The complexity of emissions reduction schemes drives demand for more risk management tools. In the US, the elaborate arbitrage of bringing low carbon fuel to the west coast leaves traders exposed to the Low Carbon Fuel Standard (LCFS) and renewable identification numbers, in addition to other risks. Even though over-the-counter credit activity has risen substantially, the availability of a successful listed product for both of these would be a boon to the market. The California AB32 and Renewable Greenhouse Gas Initiative (RGGI) futures and options show that successful contracts can be created.
How has the biofuels market changed over the past 12 months? What are your expectations of market dynamics for the coming year?
Greater volumes of low emission feedstocks, such as used cooking oil, moved into markets with strong GHG reduction targets in 2016. This trend continues in 2017 with California importing sugar cane ethanol to meet its LCFS needs, while the US remains the world’s top ethanol producer and exporter. The US exported more than 1 billion gallons of ethanol (3.8 million cubic metres) in 2016, and 2017 is already off to a strong start. The wild card this year will be the rise of protectionist legislation as more anti-dumping duties and tariffs are discussed, potentially adding even more complexity to the global market. Additionally, competing GHG reduction programmes are starting to bring the power and fuel sectors into the same space. As programmes such as California’s LCFS and cap-and-trade – which has expanded to Quebec and Ontario – cover both power and fuel, traders find themselves exposed to new risks. Electric utilities and municipal public transit authorities are finding themselves sellers of LCFS credits, while refiners must deal with dual compliance in both cap-and-trade and LCFS programmes.
How important is a broad global visibility when trading in the biofuels market? How does SCB provide its clients with access to this type of outlook?
As biofuels markets continue to grow, a global perspective is imperative. With offices in the Americas, Europe and Asia, and with our deep market knowledge, SCB offers a unique ability to connect our clients to global opportunities. When the prices of biofuels, compliance credits and carbon credit values begin to open arbitrage opportunities, our clients are already lining up the trade or are aware of the implications for their market. Our global perspective leads us to look ahead and expand our reach. For instance, observing the rise of GHG emissions programmes, SCB started a desk dedicated to the carbon markets where we cover California AB32, LCFS and RGGI markets. This addition to our portfolio of products continues to grow our value as a one-stop shop for our clients.
This is SCB’s fifth consecutive year as the number one biofuels broker in the Energy Risk Commodity Rankings. To what do you attribute your continued success in this market?
At SCB, our motto is “we never stop”, and that attitude has always defined our outlook. SCB adds value for clients through our work practices. We believe in being enterprising and driving to creative solutions. We are comfortable with responsibility and accepting the consequences – good and bad. We are committed to the relentless pursuit of our clients’ goals, and we are guided by our integrity, avoiding anything we could not justify to our stakeholders. Together, these commitments drive us to uncover new solutions and opportunities to present. We are proud to have been voted number one by clients again for 2017 and hope we continue to be deserving of their trust in the future. The promotion of low carbon fuels is our underlying goal at SCB. In addition to working to lower costs and creating opportunities for clients, we feel a broker can assist markets to develop in other ways. We work with exchanges to bring useful risk management products to market, participate in conferences and educational programmes, and lend our experience to the conversation within industry groups such as the Low Carbon Fuels Coalition.
Biofuel and Carbon Broker