Distillates are pulling biofuels into the center of the energy crisis

May ICE gasoil expired today, but the market did not normalize afterward. June gasoil settled near $1,223/mt while December closed near $959/mt, leaving the Jun/Dec structure at +$264/mt backwardation. Even after expiry, the market continues pricing acute prompt distillate tightness.

Refining economics remain extreme. U.S. screen heat cracks are near $72/bbl while screen 3:2:1 cracks approach $60/bbl with WTI crude only near $102/bbl. Refiners are being rewarded aggressively for maximizing diesel and jet output rather than optimizing blending economics.

Heat Crack Margin

This also explains why refiners are not panicking despite D4 RINs now trading above $2.00/RIN, including some 2027 structure. Under normal margins, this type of compliance cost would force more aggressive blending. But at current crack margins, refiners are still highly incentivized to maximize fossil throughput. In the U.S., postponing blending becomes easier when the underlying barrel remains this profitable.

Europe is increasingly different. Northwest Europe is facing a much tighter physical distillate balance, especially in diesel and jet fuel. There, biodiesel, renewable diesel and SAF are functioning more visibly as extensions of the distillate pool itself rather than simply compliance tools. Spot UCOME traded near $1,612/mt FOB ARA while HVO Class 2 remained near $3,000/mt. Spot gasoil around $1,220/mt still leaves strong replacement economics for waste-based molecules.

Jet fuel is becoming one of the most important parts of the story. Several European countries are now projected to approach critically low commercial jet inventory cover later this year. At the same time, Singapore jet traded near $158/bbl while Singapore 10ppm diesel reached $160/bbl. The market continues rewarding middle distillates globally.

That tightness is driving accelerating investment into SAF capacity in the United States. Calumet confirmed that its MaxSAF project was completed on time and on budget, adding roughly 150 million gallons/year of SAF capacity. The company also indicated SAF contracts are achieving premiums of roughly $1-2/gal above renewable diesel economics in some cases. Gevo also reported renewed financing interest around its alcohol-to-jet platform while EIA raised its broader “other biofuels” production outlook for 2027 by more than 10% month-on-month. An FT article today emphasized how hedge funds are trying to position themselves towards Biofuels.

What is interesting is that straight SPK-HEFA economics still often favor renewable diesel rather than SAF production. With screen heat cracks near $72/bbl and diesel molecules globally short, RD remains highly attractive on a pure refining basis. What increasingly changes the equation for SAF is the additional monetization of Scope 3 emissions, corporate aviation agreements and environmental attribute sales layered on top of the fuel itself. Those additional margin streams increasingly justify SAF expansion beyond the underlying refining economics alone.

The ethanol market shows a similar contradiction. Chicago ethanol traded around $1.89/gal while ethanol net of D6 RIN value remains deeply discounted to gasoline in several U.S. markets. In Los Angeles, ethanol adjusted for D6 RINs trades close to a $4/gal discount to CARBOB gasoline. Yet migration toward higher blends remains gradual because refiners are still earning exceptional gasoline and diesel margins simultaneously.

That strength is now transmitting directly into agricultural feedstocks. July CBOT bean oil closed near 75.36 cents/lb, equivalent to roughly $1,661/mt, despite USDA maintaining Brazil’s 2025/26 soybean crop near 180 mmt. Bean oil is increasingly trading as a diesel replacement molecule rather than purely a soybean product. It will not be a good day for Soyoil if it finds out that blending of Biodiesel/RD is dissapointing with oilshare at 53%. Fortunately that EIA data comes out 3 months late.

Today’s WASDE reinforced that contradiction. USDA raised Argentina corn production by 7 mmt to 59 mmt and increased Brazil corn production to 135 mmt while maintaining Brazil soybean production near 180 mmt. Yet global stocks still tightened modestly. World corn ending stocks for 2026/27 were projected at 277.5 mmt versus expectations near 289.5 mmt while wheat stocks fell to 275.0 mmt versus expectations near 280.8 mmt. U.S. soybean carryout for 2026/27 was projected at only 310 million bushels versus 340 million this year.

The biodiesel and renewable diesel markets continue confirming demand growth. U.S. conventional biodiesel screen margins improved toward $0.855/gal while RD-style economics improved toward roughly $0.310/gal. D4 RINs actively trading into 2027 above $2.10/RIN show that the market is beginning to extend the compliance shortage narrative beyond the current year.

Europe remained firm despite the approach of the Ascension holiday period. RME traded near $1,469/mt FOB ARA while FAME 0 was assessed near $1,449/mt. UCOME premiums versus gasoil remained above +$417/mt while HVO replacement values stayed above +$1,700/mt over gasoil escalated swap values.

Asia continues driving the physical tightness. Asia ex-China crude inventories have collapsed toward roughly 535 million barrels versus more normal seasonal levels near 590-610 million barrels. The market increasingly prices logistical vulnerability around Hormuz rather than outright closure. Freight, rerouting, insurance and replacement costs remain the dominant fears.

The result is that agricultural commodities increasingly function as energy proxies. Corn behaves more like a gasoline extender. Bean oil behaves more like a diesel molecule yet its implied volatility is closer to agricultural products at 25% while diesel implied volatility is 78%. SAF trades increasingly as strategic aviation supply while HVO functions as strategic distillate supply.

That is why today’s market action matters. May gasoil expired, but the stress did not disappear. Screen heat cracks near $72/bbl, screen 3:2:1 cracks near $60/bbl, Jun/Dec gasoil at +$264/mt, D4 RINs above $2, bean oil above $1,660/mt and HVO near $3,000/mt all point toward the same conclusion. Biofuels are increasingly becoming part of the core liquid fuel system supporting diesel, jet and gasoline balances globally.