Biodiesel margins resurface as markets price war risk and weak $

Crude and products led again. WTI rose more than 3 percent to trade above $62 per barrel, while Brent gained over 3 percent into the $67 to $68 range. ICE low sulfur gasoil settled near $690 per metric ton. The curve tightened materially at the front. February–March backwardation stands near plus $10 per metric ton, while February–April is around plus $25. Roughly 40 percent of the front three month backwardation is concentrated in the first spread, a configuration normally associated with immediate supply stress rather than a paper driven rally.

That structure contrasts with selective spot activity. Window participation remains limited, with February cargoes still circulating in Asia as of late January. Asian gasoil refining margins eased back toward roughly $21 per barrel from levels above $25 earlier in the month. Despite softer margins and thin liquidity, sellers continue to demand a premium for nearby barrels, as reflected in the plus $10 to plus $25 backwardation across the front of the curve.

The apparent tension between tight prompt structure and predictive markets on Iran is a matter of timing. Prediction markets currently price the probability of a US or Israeli strike on Iran over the next few days at roughly 7 to 10 percent. Over a one to six month horizon, those probabilities rise toward 40 to 60 percent. Gasoil spreads are responding to physical constraints today, not expectations of immediate war. Geopolitical risk is being priced further out the curve, while the front end reflects logistics, winter disruption, and supply allocation. What I think is more likely is a blockade of Iran crude exports to its client states.

Several near term factors explain the concentration of backwardation. Recent winter disruptions temporarily removed up to 2 million barrels per day of US oil production, roughly 15 percent of output, even if only for several days. Venezuelan crude flows are also being diverted. Around 50 million barrels of Venezuelan crude are now marketed under US control, with priority given to US refiners. Indian refiners report receiving near zero spot offers in recent weeks. These factors tighten prompt availability and reduce flexibility in the Atlantic Basin without removing supply from the global system outright.

Natural gas provides a useful contrast. Recent gas strength was driven by storm related demand and by US export cargoes to Europe being priced during that window at elevated levels. Those export prices are now fixed. Weather forecasts for early February show above normal temperatures across much of the central and eastern United States, with daytime highs in the 30s to 50s Fahrenheit. With LNG flows steady and storage adequate, downside risk increases as the weather premium clears. A retracement on the order of 40 to 50 percent from storm driven highs remains plausible.

Currency moves add to the macro backdrop. The US dollar index traded near 96, the weakest level since February 18, 2022. A move from the 100 to 105 range seen through much of 2024 to the mid 90s supports nominal commodity prices and improves non US purchasing power, while also reflecting fiscal and political stress. US Treasury is in a tough situation right now.

Vegetable oils remain split between futures strength and physical pressure. Brazilian soyoil FOB Paranaguá for April–May is indicated around minus 600 cts per pound versus CBOT, equivalent to roughly minus 6 cts per pound under soybean oil futures. This reflects aggressive export availability and accelerating Brazilian crush rather than a collapse in flat price. The erosion of export premiums is sufficient to cap sustained upside in soyoil futures under normal conditions.

Asia offsets part of that pressure. Malaysian palm oil production in January declined by low double digit percentages month on month, while exports for January 1 to 25 rose by roughly 8 to 10 percent versus December. Palm futures moved to multi week highs, firming the floor under the broader vegoil complex and limiting downside spillover from South American soy.

Policy support in the United States is translating into margin. D4 RINs remain firm, with December 2026 trading near 1.365. At that level, the RIN contribution improves the US biodiesel screen margin to roughly minus 7 cents per gallon before any 45Z credit. Earlier in January, margins were closer to minus 25 to minus 30 cents per gallon, implying an improvement of roughly 20 cents per gallon driven by policy pricing.

Europe still shows margin, even where spreads look stuck. In the ARAG window, RME traded around $1,377 per metric ton flat price. Using rapeseed oil at €1,046 per metric ton and a dollar euro rate of 1.20 implies an RSO cost of about $1,255 per metric ton, which yields a gross RME margin of roughly $122 per metric ton. This gross margin exists even with the RME versus FAME 0 spread pinned near $55 per metric ton. FAME 0 and UCOME traded $20 to $25 above their monthly averages, reinforcing the idea that margin recovery is product specific rather than uniform.

HVO Class II lagged. Trades near $2,425 per metric ton placed HVO roughly $186 below the monthly average. The move reflects premium compression rather than changes in feedstock or energy costs and points to softer discretionary demand.

Washington risk remains elevated. Predictive markets price the probability of a US government shutdown ahead of the funding deadline at roughly 75 to 80 percent. A shutdown would not disrupt physical energy flows, but it would delay regulatory processes and guidance, pushing clarity on 45Z further into 2026 and prolonging reliance on RIN driven economics.

Interest rates remain sidelined. The upcoming Federal Reserve decision is priced with near zero probability of a rate change. Gold trading above $5,000 reflects longer term monetary and geopolitical hedging rather than expectations of near term policy action.

The overall picture is tension rather than collapse. Gasoil front end backwardation of plus $10 to plus $25 reflects immediate physical tightness despite no signs of any supply stress. Geopolitical risk is priced further out the curve rather than into February barrels. Vegetable oils face export premium erosion in Brazil offset by Asian palm tightening. Biodiesel margins are present and improving, supported by policy in the United States and gross crush economics in Europe, though the recovery remains uneven and policy dependent.