Diesel Backwardation Tightens as U.S. Fats Dominate Biodiesel Feedstock Mix

Diesel markets opened December with the same dislocated tone: flat price remains firm while extreme front-end tightness keeps the timespreads distorted. Dec/Apr backwardation has eased materially from November’s blow-off levels but still sits near +47.75, and critically, half of that structure is packed into Dec/Jan, reflecting how concentrated prompt tightness remains and how the market is trading almost entirely on expectations around the high-stakes, all-or-nothing U.S.–Russia negotiations now underway in Moscow. This is not a ceasefire framework and Europe is largely out of the room, which explains why traders remain unwilling to buy the front end, even with cracks off their peak. Heating oil remains well supported, with HOZ/HOF carrying enough backwardation to keep ICE gasoil elevated at $698.63/mt and directly shaping biofuel flat prices in ARAG.

In ARAG, RME traded at a premium of +761.43 over gasoil, giving a flat price of $1,460.06/mt. FAME sits at +624.25, producing a flat price of $1,322.88/mt. UCOME at +792.25 results in a flat price of $1,490.88/mt, and HVO Class 2 printed near +1,450, giving a flat price of $2,615.82/mt. With EUR/USD at 1.1635, gross margins in USD terms remain tight across the board when applying current feedstock inputs. RME, using rapeseed oil values, delivers roughly –$80 to –$110/mt depending on plant configuration. FAME, using soyoil, is closer to flat-to-slightly negative. UCOME margins, using UCO ex-works indications, are marginally positive around +$40–$60/mt. HVO Class 2, also using UCO as the feedstock, remains the tightest of all, with gross margins near flat once hydrogen and fuel-gas offsets are accounted for. SAF, also built off UCO inputs, continues to show negative margins that have discouraged blending except where obligated. Producers are operating on razor-thin economics as the flat price strength is purely gasoil-driven, not biodiesel-driven.

Futures correlations continue to reinforce the theme: BOGO for Jan stands around +484 (soybean oil rallying slightly versus gasoil softening), BOPO Jan is +159 and rising—an exact opposite structure to last year and a clear reflection of the U.S. biodiesel island effect. U.S. supply is building, diesel cracks remain high, and the U.S. is importing very little discretionary RD/renewable diesel, which forces BOPO to carry a stronger premium than seasonally expected. In contrast, BOGO remains heavy, supported only by a slight softening in gasoil and a modest uptick in bean oil. POGO is steady with palm not rallying meaningfully despite weather noise, and Europe’s palm oil import pull remains muted through Q1.

BOPO

South America continues to anchor the bearish tone in vegoils. Paranaguá FOB soyoil premiums for new crop (Apr/May) remain deeply negative near –$580/mt, one of the clearest signals that global oilseed supply is heavy and end-user forward demand is weak. This fits with the broader landscape: Brazil’s crop estimates continue to grind higher toward 178 MMT, Argentina’s export availability is improving, and Australia raised its canola output outlook. Despite China’s heavily publicized purchases of U.S. soybeans, these trades are deeply unprofitable relative to domestic crush margins. With crushers in China still operating under special tax structures that allow them to import beans, crush them, and export oil with tax offsets, the only way to make the current U.S. purchases palatable is to export more soyoil. This is why Chinese soybean oil exports remain abnormally high and why the global market is not tightening. The widely circulated notion of a 12-MMT China purchase target from the U.S. remains political rather than commercial, and China has not endorsed it publicly.

In the U.S., EIA released September feedstock usage—always two months delayed and therefore a rear-view-mirror snapshot. The data confirm the structural shift underway: total feedstock use is running +2.1% over last year, but the growth is almost entirely in tallow, which surged from 20% of the mix to 27% of all inputs. Yellow grease fell from 20% to 14%, white grease ticked higher from 2% to 2–3%, and canola and corn oil held their weight. Soybean oil remains the dominant feedstock but dropped from 36% to 35%. The U.S. is clearly moving toward a fats-heavy carbon-intensity profile, driven by both 45Z positioning and the seasonal availability of animal fats, which helps explain why BOPO is rallying while BOGO lags. Operable RD capacity remains structurally unchanged, with expansions delayed or paused pending clarity on 45Z guidance. As a result, the U.S. remains a self-contained biodiesel/renewable diesel island—imports are light, exports are minimal, and domestic feedstock flows are increasingly dictated by policy rather than global price signals.

Adding to today’s flow of news, the Gunvor management buyout matters symbolically but not operationally for biofuels. After the failed attempt to acquire Lukoil’s European and Iranian assets, Gunvor needed to “Americanize” its structure and distance itself from Russia-adjacent optics. Torbjörn Törnqvist is exiting, and the company moves into a fully employee-owned model under Gary Pedersen. This improves Gunvor’s ability to transact with Russia and potentially Venezuela, but it will have minimal impact on biofuels since Gunvor withdrew from the Amsterdam HVO project years ago and has no active SAF/HVO build-outs in Europe or the U.S. The VARO HVO/SAF project remains subject to financing and has not reached FID. For traders, the meaning is simply that one of the world’s largest physical energy traders will tighten its governance posture at a time when geopolitical barrels are increasingly sensitive, but it does not shift biofuel fundamentals.

Across all regions, the market’s core theme remains unchanged: diesel is tight, backwardation is severe, biodiesel flat prices are being pulled higher by gasoil rather than their own fundamentals, vegoils remain heavy, and the U.S. feedstock mix continues its shift toward low-CI fats. BOPO rising, Paranaguá still at –580, and EIA confirming a fats-dominant U.S. feedstock profile all point to a market that is trading politics and distillate scarcity—not an underlying tightening of biofuel supply.