Biodiesel No Longer Optional

Distillate tightness builds as diesel and jet lead the shortage while futures discount physical stress

Markets are trading the idea of resolution. Brent has moved back below $100 per barrel, U.S. equities have recovered, and the dollar has weakened as negotiations between the U.S. and Iran are expected to resume. This pricing implies normalization, but the structure of the market shows something different.

There is no immediate shortage of crude. The critical shortage is in distillates, with diesel and jet fuel at the front of the tightness. A China analyst stated today that China has 200 days of consumption covered corresponding to 300 days of imports. China has barred exports of refined products since beginning of Hormuz closure to protect pricing in the domestic market. Russia has done the same. Only the US has left their refined products export market open to exports.

Flows through the Strait of Hormuz remain impaired. Vessel traffic that was running near 70 to 80 transits per day before the escalation dropped to near zero in early March and has only partially recovered. This means the system is still relying on pre disruption cargoes that take two to four weeks to arrive, keeping prompt availability tight even as futures soften.

At the same time, the global system is losing finished product supply. China and Russia are restricting exports of diesel and other refined products that they usually export. These are the barrels that typically balance regional shortages. Crude can still move, but the ability to convert and export distillates is constrained. That is where the pressure sits.

This is visible in Asia. Singapore marine fuel sales rose 6.6 percent year on year to 4.77 million metric tons in March, while inventories declined by 1.743 million barrels to 21.722 million barrels, a ten week low. Marine gasoil sales fell to 352,300 tons, the lowest level in ten months. This is price rationing. Demand is not disappearing, it is being priced out at the margin as diesel tightens. Jet fuel markets show similar strength as aviation demand holds and supply routes remain disrupted.Futures are not reflecting this tightening.

Chicago soybean oil is trading near 66.0 cents per pound, while physical soybean oil out of Brazil is still offered at discounts of minus 1,250 to minus 1,500 points versus Chicago, equivalent to roughly minus $27.5 to minus $33 per metric ton FOB Paranagua. Futures are pricing softer demand while physical markets are dealing with logistics dislocation and tight prompt supply.

The soybean oil curve is now confirming that shift. The May July spread has moved into backwardation, last around plus 0.18 cents per pound. That inversion is driven by biodiesel economics. Since the EPA announcement, U.S. biodiesel screen crush margins have been above $1.00 per gallon, pulling prompt soybean oil demand forward.

This creates a feedback loop. Strong margins pull feedstock forward, tightening nearby supply and inverting the curve. That inversion then raises replacement costs for producers. You are buying expensive prompt oil while biodiesel prices remain anchored to a distillate market that has not fully repriced the shortage. The result is compression of forward margins even as current margins remain strong.

The system is also tightening geographically. As pre conflict cargoes are absorbed, Asian buyers are pulling additional barrels from the Atlantic Basin. This increases freight distances and tightens availability in Europe and the U.S. The shortage is being redistributed, not resolved.

Policy is reinforcing biodiesel and renewable diesel demand directly into this tight distillate system. Malaysia is moving from B10 toward B15, starting with B12, implying a 20 to 50 percent increase in biodiesel blending. Brazil is already at B15, meaning 15 percent of diesel demand is structurally biodiesel. A move to B16 would increase biodiesel demand by roughly 6 to 7 percent, directly increasing feedstock demand.

SAF in US adds incremental pressure on the same feedstock pool. Current volumes remain small at roughly 36,000 tonnes or about 12 million gallons in a representative airline case, but growth rates above 400 percent year on year show direction. SAF competes directly with renewable diesel for UCO, tallow, and vegetable oils, tightening the marginal supply that supports both diesel and jet fuel replacement.

Costs for conventional Biodiesel remain elevated as stated yesterday. Methanol represents close to 60 percent of biodiesel transformation costs. Fertilizer inputs are also tightening, with sulfur above $800 per ton CFR Brazil, increasing crop production costs and supporting vegetable oil prices. Feedstock is not loosening into this structure despite abundant crops.

Credit markets continue to diverge. D4 RINs are trading near $1.79 per gallon, supporting U.S. biodiesel and renewable diesel blending, while British Columbia LCFS credits averaged $160.28 in the first quarter with a range from $85 to $259, showing weaker and more volatile incentives outside the U.S.

The key question is when the distillate system breaks. Singapore inventories at 21.7 million barrels are already at a ten week low, marine gasoil demand is being rationed, and finished product exports are restricted. These are early indicators of stress in diesel and jet fuel, not crude.

My view is that futures are discounting this tightening because they are anchored to crude and macro sentiment that is built on hope of an early end to the conflict. I am not in that camp. I think this crisis extends into the summer. I hope am wrong for the world economy. The constraint is in distillates and will increasingly build in the feedstocks that support biodiesel and renewable diesel. As inventories decline and replacement diesel and jet barrels cannot be sourced easily, the gap between paper and physical will close as we have already seen in recent spikes with negative premiums for FAME in Europe. . When that happens, distillates reprice higher, and biodiesel, renewable diesel, and SAF are pulled higher as integral components of the supply stack rather than discretionary blends.