PBF ENERGY INC. 
By 
As refiners scrambled this year to meet an expected steep rise in the amount of ethanol that must be blended into gasoline, trading in little-known credits used to enforce the quotas turned white-knuckled. RINs, or renewable identification numbers, have traded for years in a niche market for pennies apiece. In mid-July they soared to nearly $1.45 from about 5 cents last December, providing huge opportunities for oil traders and others in the market.
Oil refiners such as PBF Energy Inc (>> PBF Energy Inc) railed against the rally, blaming it on a flawed renewable fuels program and rampant speculation. They said meeting next year's ethanol blending quota was impossible because they couldn't sell fuel with more than 10 percent ethanol without risking damage to car engines or breaching warranties. This caused the surge in demand for RINs. Refiners vowed to pass on nearly $2 billion in costs to consumers through higher gasoline prices.
The winners have been less vocal, but brokers and traders active in the loosely regulated market say that privately held Vitol, the world's largest trader of oil, appears to have done especially well. That view is based on outside observations of how the company traded in the over-the-counter market, as well as its decade-long effort to build an unrivalled network of U.S. ethanol blending terminals and overseas suppliers that gave it a prime place in the RINs market.
Seven sources, including those at three major brokerages who do direct business with Vitol, said it was a big buyer of RINs early in the year before prices spiked. Several also said its Houston-based trading team was a prominent seller as prices climbed.
"They're the success story of it all," said one source who trades with Vitol. Other market participants confirmed that the company was among the largest traders they saw in the RINs market, despite its owning no U.S. refineries or fuel stations. They said they didn't know if it had made money.
Vitol Chief Executive Ian Taylor, speaking at the Reuters Commodities Summit this week, said RINs were a "notoriously difficult animal.
"I wouldn't say we got it particularly brilliantly right or anything like that. You make an assessment of how many RINs are available in the market ? and what the demand is going to be. What you get right in 2013 you might have got wrong in 2012 or for 2014."
Spokeswoman Andrea Schlaepfer said Vitol "buys and sells RINs on a regular basis" because it has its own biofuel blending obligations to manage. She declined to comment on specific trades or whether the company made a profit through its activities. She said it had no traders dedicated solely to RINs and did not consider itself one of the biggest participants in the market.
For many observers, Vitol and other traders simply responded early to a glitch in the regulations that threatened to cause a shortage of credits next year. Such opportunism was perfectly permissible. Vitol and others may have profited from the glitch, but they did not cause it, experts say.
"They're entrepreneurial, they're skillful and they look at the regulations and figure out how to make money," said Philip Verleger, an energy economist based in Colorado who testified about the RINs market at a Commodity Futures Trading Commission meeting this summer.
Still, Vitol's apparent trading success will only add to the fierce debate over the future of a controversial 2007 law aimed at increasing the amount of ethanol in U.S. gasoline. It may also stoke political scrutiny of the RINs market, which has been this year's wildest in the commodities world. Several lawmakers have called on the CFTC to more closely examine the market.
BOXTOP CREDITS
RIN credits are simply a means of enforcing government blending mandates.
Every gallon of ethanol manufactured in or imported into the U.S. receives a 38-digit RIN that tracks its progress throughout the fuel chain. Once a refiner buys the gallon and blends it with gasoline, the RIN can be separated from the gallon and presented to the Environmental Protection Agency as proof of compliance with the mandate - akin to clipping a coupon from a cereal box to show proof of purchase.
The RINs also allow companies such as wholesalers who predominantly blend fuel but don't import or refine any gasoline to sell excess RINs to companies that need them in order to meet EPA obligations.
In some respects, Vitol's prominence is the result of years of quietly positioning itself as a key player in the U.S. renewable fuels markets. It was the country's biggest importer of ethanol last year as its shipments more than tripled, and has long employed a unique arrangement importing Brazilian ethanol via an El Salvador processing plant, according to U.S. government data, an activity that can help it generate RINs.
In 2010 Vitol built a $130 million oil terminal on Florida's east coast and added a biofuel facility last year, giving it a major foothold in the import-dependent state. It maintains ethanol storage, supply and distribution facilities in all key U.S. energy hubs, including New York Harbor, Chicago, Florida, Houston, San Francisco and Los Angeles.
By 2010, when the EPA finalized its rules for RINs trading, Vitol said in a brochure that it was "ideally placed" to ride the expanding ethanol market; Vitol was developing a blending program and looking for more opportunities in the business, it said. At the time, the value of an ethanol RIN was negligible; the credits traded at less than 5 cents for most of 2010 and 2011.
Whether Vitol's ethanol blending and import activity offset the regulatory obligations resulting from its gasoline imports is unknown. (Gasoline importers, just like refiners, are required to provide RINs to show their compliance.) Vitol has a "significant and fluctuating" RIN obligation whose management is the "primary driver" of its RIN trading, Schlaepfer said.
Nor is it clear to what extent Vitol engaged in speculative trading. Market sources said its activities appeared consistent with bets on rising prices in the early days of the rally, but only Vitol knows for sure. As prices surged this year, such trading likely "exacerbated" the rally, said Divya Reddy, energy analyst at policy consulting firm Eurasia Group in Washington
DC.
Vitol said in a recent business brochure that trading in other commodities - a group that includes renewable fuels and RINs as well as metals, chemicals, carbon and coal - made up less than 9 percent of its $303 billion in revenues last year. It does not disclose profits.
Other companies that have made money from RINs include oil giant BP Plc (>> BP plc), which said in July that it was "able to trade into this spike recently and have done quite well out of it." To a lesser extent, some banks and hedge funds have also participated. Even a Missouri academic saw the potential for a spike.
The market for RINs is tiny compared to oil, but the dramatic volatility offered scope for outsized returns. In June and July, at the peak of the rally, at least 2 billion 2013 separated ethanol RINs were transacted, nearly two-thirds of the total secondary market volume for the first seven months of the year, according to a Reuters analysis of EPA transaction data. That's about $1 billion a month for the period, based on average prices.
TROUBLE AHEAD
For many observers, the troubles stirring in the RIN market were increasingly apparent toward the end of 2012.
The 2007 law that established the current RIN market called for boosting ethanol to 15 billion gallons by 2015, an increase that assumed steadily rising demand for gasoline that would keep the ratio of ethanol to petroleum-based gasoline below 10 percent.
Instead, gasoline demand has fallen sharply. Without measures to relax the rules, the quotas for 2014 threatened to push gasoline supplies beyond the so-called blend wall - the 10 percent ethanol mix that refiners say is the maximum they can sell.
Last December, Wyatt Thompson, an agricultural economist at the University of Missouri, published a paper titled "A Question Worth Billions: Why Isn't the Conventional RIN Price Higher?" In it, he predicted the price of RINs could soon increase more than tenfold from levels near 5 cents a credit.
His predictions proved conservative. Between the end of December and early March, RIN prices soared to nearly $1.05 each from about 5 cents.
Panicked refiners jumped in to buy the credits before prices moved even higher. As they did so, traders said they also saw Vitol - which they said had been an avid buyer earlier in the year - selling some credits. Three sources mentioned 60 cents as one price.
Schlaepfer declined to comment on specific trades presented by Reuters.
Whether Vitol fared as well while the RIN bubble deflated is not clear. Prices tumbled after the EPA hinted in August that it would use "flexibilities" in the 2007 law to reduce blending quotas. An agency proposal leaked last month showed it suggested a deep reduction in the ethanol mandate for 2014, causing a further decline in prices to as low as 23 cents each - a price not seen since late January. On Wednesday, RINs traded at about 30 cents each.
Schlaepfer said whether RINs rise or fall is of "limited importance" to Vitol. "We are no better (or worse) off than any other obligated party in the industry."
Regardless of how Vitol made out, CEO Taylor said he saw little future in the RINs market, whose fate now resides in Washington: "Any business that is government-determined is not particularly sustainable, in my view."
(Reporting by Cezary Podkul in New York, Dmitri Zhdannikov in London; editing by Joshua Schneyer, Jonathan Leff, Martin Howell and Prudence Crowther)
By Cezary Podkul
