Distillates Signal Stress as FX Skews Biofuel Margins

Today’s session highlighted how energy, currency, and biofuel markets are sending conflicting signals, with basis and FX doing more work than flat prices.

The U.S. winter storm again exposed the fragility of Northeast energy supply. Petroleum fired power generation overtook natural gas for roughly 36 to 48 hours as pipeline congestion limited gas deliverability. This occurred despite gas being nominally available. Natural gas pricing proved unreliable as an indicator. Henry Hub collapsed to about 3.86 dollars per MMBtu after trading close to 7 dollars per MMBtu last week, a decline of roughly 45 percent in days. That magnitude and speed point to a financial weather manipulation premium unwind rather than a durable shift in physical balance.

Distillates told a different story. The Heating oil versus ICE gasoil spread remained firm and has returned to roughly a 57.6 dollar per metric ton discount for ICE gasoil versus Heating oil. That basis correctly reflected localized U.S. distillate tightness during the storm, unlike flat gas prices. This basis strength matters for biodiesel. Northeast heating oil demand tightens local distillate inventories and supports biodiesel blending under state mandates, even when headline margins remain volatile.

Currency markets added a second layer of distortion. The dollar weakened, but the more important move was the strength of the euro and the Swiss franc. This strength is not matched by European growth, interest rate differentials or energy fundamentals and instead reflects capital reallocation. The impact on biofuels is mechanical. European feedstocks priced in euro inflate in dollar terms, while gasoil and biodiesel remain priced in dollars per metric ton even in Europe.

ARAG window activity was quiet, but price signals were clear. RME rebounded to a flat price around 1405 dollars per metric ton, reflecting supply discipline rather than a demand surge. UCOME moved only about 10 dollars per metric ton higher on the day, confirming weaker relative support. Hydrotreated products stayed under pressure. HVO Class II fell about 35 dollars per metric ton to roughly 2358 dollars per metric ton flat price. SAF traded near 2124 dollars per metric ton, well below the average level seen earlier in the month.

Feedstock pricing illustrates the FX mismatch. Rapeseed oil in Northwest Europe traded near 1055 euro per metric ton. At current exchange rates, this converts to about 1266 dollars per metric ton. Against prevailing biodiesel pricing, this implies a gross margin near 139 dollars per metric ton. That margin exists on paper, but it is highly exposed to FX. As long as the euro remains firm, euro priced feedstocks stay expensive in dollar terms, while gasoil fails to lift enough to absorb the increase.

UCO pricing stands in contrast. UCO in Northwest Europe is around 1170 dollars per metric ton and is priced directly in dollars, as is POME. This gives waste based feedstocks immediate FX relief relative to rapeseed oil. That currency split explains why UCOME margins appear more resilient than RME margins, even though UCOME flat price gains lagged RME today.

Agricultural data reinforce the supply side story. German soybean meal exports from July to November totaled about 741,000 metric tons, down roughly 11 percent from about 836,000 metric tons last year. Rapeseed meal exports fell more sharply to about 537,000 metric tons from roughly 687,000 metric tons, a decline of about 22 percent. This is not substitution between meals. It signals lower crush throughput. Reduced crush limits vegetable oil availability and supports local oil values even as global oilseed supply remains ample.

Geopolitical risk remains elevated heading into the Year of the Horse starting on 12th, and it is not limited to one region. In the U.S., the risk of a federal government shutdown has not disappeared (56% now). Even a short disruption would delay regulatory decisions, slow agency approvals, and inject headline risk into energy and biofuel markets already sensitive to policy signals. In the Middle East, tensions around Iran continue to underpin crude and distillate risk premia. Any escalation would immediately affect shipping routes, insurance costs, and prompt time spreads, with knock on effects for gasoil and biodiesel pricing. At the same time, Lunar New Year festivities across Asia reduce liquidity and slow physical trading, particularly in vegoils, freight, and refined products. Lower participation during the holiday period tends to exaggerate price moves and widen bid offer spreads. Taken together, shutdown risk, Middle East uncertainty, and seasonal liquidity gaps argue for caution, even as some flat prices appear to have corrected sharply.