Diesel Extension Barrels Are Running Thin

Markets started the week with another broad risk-on move across energy and agricultural feedstocks despite hopes last week that the Trump-Xi meeting in China would calm geopolitical tensions. WTI June traded at $106.58/bbl, up $1.16, while Brent July traded at $110.35/bbl, up $1.09. The move came as global observed oil inventories have fallen from roughly 8.2 billion barrels in February toward 7.95 billion barrels by April and May, one of the sharpest seasonal drawdowns since 2021. Floating storage remains close to 100 million barrels while oil-in-transit is still near 1.15 to 1.20 billion barrels, showing the system is increasingly dependent on moving barrels rather than comfortable storage levels.

The Memorial Day setup is now the key U.S. risk. RBOB June traded at $3.7451/gal, up 4.32 cts, and is now up nearly 70% over three months. The Jun/Dec RBOB spread remains heavily backwardated at +106.4 cts/gal while Jul/Dec remains near +92.2 cts/gal. That is not a relaxed gasoline market heading into the first major summer driving weekend. If geopolitical tensions continue to support crude this week, pump prices should rise quickly because the forward curve is already pricing tight nearby supply.

Distillates remain equally stressed. June heating oil traded at $4.0985/gal, up 4.51 cts, while July heating oil traded at $3.9862/gal, up 6.50 cts. The July/December heating oil spread remains +55.4 cts/gal even after some intraday softening. Heat cracks remain near $65/bbl while the 3:2:1 crack is still above $55/bbl. Refiners continue to run hard because margins remain historically attractive, yet inventories are not rebuilding fast enough.

Heat Crack Margin

Europe continues to reflect the same scarcity. ICE gasoil June settled near $1,224/mt with the June/December spread still above $220/mt. NWE 10ppm diesel CIF cargoes were assessed at $1,259/mt, up $32.25/mt, while MED 10ppm CIF cargoes traded at $1,263.75/mt, up $22.75/mt. Jet fuel remains one of the strongest components of the barrel with NWE CIF jet at $1,374/mt, up $31.25/mt, and NWE FOB jet barges at $1,364.75/mt, also up $31.25/mt. SAF NWE 2% jet blend values traded near $1,408/mt, up $31.29/mt.

Biofuels continue to trade as extension barrels rather than discretionary blending. In the ARAG market, RME traded at +290 to +323 over gasoil, FAME traded at +270 to +285, UCOME traded at +405 to +450 and HVO Class II traded near $1,270/m3. Using June gasoil near $1,224/mt, prompt flat prices reached roughly $1,494 to $1,547/mt for RME, $1,494 to $1,509/mt for FAME and $1,629 to $1,674/mt for UCOME. HVO Class II remains close to $2,985/mt on broader broker indications.

European biofuel paper activity also remained elevated. Week 19 paper volumes reached about 601,000 mt with RME at 146,500 mt, FAME 0 at 86,700 mt, UCOME at 201,100 mt and HVO2 at 167,100 mt. That compares with Week 18 near 507,000 mt and Week 17 near 453,000 mt. Commercial hedging activity remains intense as the market positions into a structurally tight summer.

Vegetable oil is also flashing warning signs. July soybean oil traded at 75.72 c/lb, up 1.84 c/lb on the day and nearly 28% over three months. In metric terms, July soybean oil is now around $1,668/mt. BOPO exploded to nearly $540/mt for July, up more than $40/mt on the session, while September BOPO remains above $456/mt. BOGO strengthened with July near $489/mt and September near $525/mt. BOHO moved back toward 1.70 c/gal. The key point is that soybean oil strength is no longer suppressing diesel values. Both are moving higher together, which usually signals broader structural tightness in the diesel pool.

The RFS island effect remains visible. Brazil Paranaguá soybean oil continues to trade at massive discounts to CBOT, with nearby indications around -1,950 to -2,070 points, while U.S. soybean oil remains structurally supported by D4 RINs and renewable diesel demand. D4 RINs remain above $2/gal with December 2026 D4 futures near $2.07. The market continues to signal that renewable gallons are still required despite high feedstock and energy prices.

The U.S. agricultural policy story is also becoming more important. The 45Z public hearing is scheduled for May 27 through May 29 with more than 70 speakers expected. The timing matters because it lands immediately after Memorial Day as summer fuel demand accelerates. The market increasingly views 45Z as a major agricultural subsidy mechanism rather than simply a biofuels credit. Implied carbon values are now estimated around $262/t CO2e for corn ethanol, $172/t for RNG, $167/t for HEFA SAF and $162/t for HEFA renewable diesel. Those economics continue to support ethanol plant expansions and low-carbon agricultural investment.

China adds another layer to soybean demand. Weekend discussions suggest China may purchase roughly 25 million metric tons of U.S. soybeans in 2026/27 while broader U.S. agricultural purchase targets could approach $29 billion annually in 2027 and 2028. Non-China U.S. soybean exports are projected near 711 million bushels in 2026/27, which would be a 13-year low even as total U.S. soybean exports recover. This implies greater Chinese concentration in U.S. soybean demand at the same time domestic soybean oil demand remains structurally supported by renewable diesel, SAF and RIN economics.

NOPA data continues to support the soybean oil tightness narrative. April crush reached 211.9 million bushels despite seasonal maintenance downtime and was still roughly 11% above April last year. Soybean oil stocks fell to 1.947 billion pounds from 2.039 billion pounds previously, although oil stocks remain above year-ago levels. Funds remain heavily involved with soybean oil length still estimated near 154,000 contracts.

Palm oil is not offering enough relief. BMD palm oil traded near 4,544 ringgit while CPO in U.S. dollar terms remains around $1,140 to $1,150/mt for June and July. POGO remains negative in the very front with May at -$71.75/mt and June at -$52.75/mt, but the structure turns positive by July at +$6/mt and rises toward +$227/mt by December. India is also considering higher edible oil import duties while importing roughly 60% of its edible oil needs. If duties rise while the rupee remains weak, global palm oil, soybean oil and sunflower oil balances will NOT tighten further.

The broader barrel continues to confirm physical stress. Singapore 0.5% fuel oil rose $30.37/mt to $854.54/mt while Fujairah 0.5% fuel oil traded near $800.72/mt. Singapore VLSFO bunker prices climbed toward $900.25/mt, up $43.75/mt. Los Angeles jet traded near $4.4534/gal, up 14.78 cts, while California renewable diesel traded around $3.6334/gal, also up 14.78 cts. B100 East Coast FOB reached $7.09/gal while B100 Chicago traded near $6.76/gal.

The numbers remain difficult to ignore. WTI above $106/bbl, Brent above $110/bbl, RBOB June near $3.75/gal, heating oil June above $4.09/gal, NWE diesel near $1,259/mt, jet fuel near $1,374/mt, D4 RINs above $2/gal and UCOME still trading up to +450 over gasoil do not describe a comfortable market. They describe a system increasingly dependent on every available mineral diesel barrel, renewable diesel barrel, biodiesel barrel and SAF molecule as geopolitical risk rises into peak summer demand.