Distillate Tsunami Ahead? not good for Biodiesel

Crude firmed again on stalled Iran talks. WTI March settled at 65.10, up 2.77 or 4.44 percent. Brent April closed at 70.37, up 2.95 or 4.38 percent. ICE gasoil March rallied to 706.25, up 34 dollars or 5.06 percent.

D4 RINs did not follow. December 2026 closed at 1.532 with 701 lots traded. The market is clearly waiting for policy. EPA’s 2026 RVO proposal is moving through White House review this week and will become final before end of March according to EPA. That is the catalyst for RIN balances.

On 45Z, Treasury and IRS released proposed rules on February 3. The credit starts at 20 cents per gallon for non aviation fuels and 35 cents for SAF for fuel produced on or before December 31, 2025. The open questions remain co processing eligibility and feedstock tracking. Those details will shape soybean oil and UCO demand.

The real story sits in the refinery system.

Gasoline cracks in Asia reportedly traded below 4 dollars per barrel. At those levels gasoline is weak. Refiners respond fast. When gasoline margins collapse and distillate margins hold, refiners maximize diesel yield.

That shift is global. Russian refined product flows into parts of North Africa have fallen sharply. Exports into Libya are near 5,000 barrels per day in 2026 versus roughly 56,000 barrels per day in 2024 to 2025. Those barrels are being rebalanced elsewhere, tightening parts of the Mediterranean and supporting gasoil. India reinforces the move. Venezuelan crude flowing into India under sanction exemption arrangements yields more distillate and less gasoline. In a weak gasoline environment, refiners push diesel output even harder. Everyone is cracking for distillate.

In ARAG, despite thin holiday liquidity from Carnival, Lunar New Year and Ramadan overlapping, the structure was clear. RME traded at 1389 dollars per metric ton.FAME 0 at 1317 dollars per metric ton.UCOME at 1428 dollars per metric ton.HVO Class II at 2572 dollars per metric ton. Margins show the hierarchy. FAME 0 screens near 43 dollars per metric ton gross margin. RME near 115. UCOME near 278. HVO Class II approaches 1000 after adjusting for yield and hydrogen. Renewable diesel remains structurally advantaged. Conventional biodiesel is far more exposed to the diesel crack.

In the US, soybean oil March closed at 58.27 cents per pound, up 1.71 percent on the day. Bean oil as percent of gasoil fell to 1.818, reflecting stronger distillate. The screen biodiesel crush improved to minus 2.41 cents per gallon for March but remains negative on forwards, excluding LCFS and 45Z.

So what does this mean for biodiesel?

In the very short term, strong gasoil supports intrinsic biodiesel value. That is why European FAME margins remain positive and why bean oil has held up. But if gasoline cracks remain depressed and refiners continue maximizing diesel, the system risks overshooting. A surge in distillate output can cap or compress diesel cracks. Weak gasoil is never good for biodiesel because biodiesel prices anchor to diesel replacement value. Feedstocks rarely fall as fast as diesel. That is the risk. Short term, biodiesel benefits from strong gasoil.Medium term, a true distillate wave becomes a headwind.

Renewable diesel can absorb some of that pressure through credit stacking in US and lower CI incentives. Conventional FAME is more directly exposed.

The next real pivot is policy. If EPA finalizes stronger RVO volumes and 45Z definitions favor low CI pathways, incremental mandated demand can absorb part of the extra diesel pool. Without that reinforcement, crack structure alone could squeeze margins quickly. Distillate is winning the barrel today. The question is whether it wins too much.