Distillates Still Tight While Soybean Oil Decouples

Crude and products sold off sharply Tuesday as markets reacted to renewed geopolitical headlines suggesting possible progress toward de-escalation in the Middle East together with another massive release from the U.S. Strategic Petroleum Reserve to insure adequate supplies. July Brent settled at $99.10/bbl, down 3.94% on the day, while June WTI fell 2.56% to $94.13/bbl. June ICE gasoil declined 5.02% to $1078.25/mt after trading as high as $1094/mt intraday. Despite the outright weakness, the Jun/Dec gasoil backwardation remains near +$170.50/mt after trading close to +$270/mt one week ago. Most importantly for biodiesel and renewable diesel traders, weekly diesel screen crack margins remain near $65/bbl versus a long-term historical range closer to $20-25/bbl. Refiners continue generating historically elevated distillate margins even after today’s sharp correction in crude.

Heat Crack Margin

The SPR release itself was dramatic. The United States released another 9.1 million barrels last week, equivalent to roughly 1.3 mb/d, marking the second-largest weekly SPR release on record and only slightly below the prior week’s record 9.9 million barrel draw. The scale of the intervention matters directly for biodiesel and renewable diesel because emergency crude releases are now being used to suppress diesel inflation and refinery margin expansion ahead of peak summer demand. The market is increasingly questioning how sustainable these interventions are if middle distillate inventories remain tight and refinery utilization remains constrained. The fact that diesel cracks remain near $65/bbl despite two consecutive weeks of enormous SPR releases suggests the physical distillate market remains structurally undersupplied.

Another important development for renewable diesel and biodiesel markets was today’s hearing and continued discussion surrounding 45Z implementation. The market continues trying to assess how future tax credit qualification, carbon intensity treatment and domestic feedstock eligibility could impact soybean oil demand and renewable diesel economics into 2027. The fact that D4 RINs remained above 2.235 even during a 4% crude correction suggests traders still expect a structurally supportive compliance environment for biomass-based diesel despite growing political scrutiny around costs and feedstock allocation.

The reduction in nearby gasoil backwardation has not translated into a collapse in biodiesel-linked spreads. July BOGO remains near +$571.58/mt while BOHO remains elevated near 1.89x heating oil. Gasoil implied volatility remains above 75% with substantial June call open interest concentrated between the $1050 and $1100 strikes. June gasoil call open interest includes roughly 3150 lots at the $1100 strike, 2100 lots at $1050 and 2600 lots at $1000. Elevated diesel volatility remains supportive for biodiesel blending economics because biofuels continue functioning as an extension of the distillate pool during periods of refinery stress and high crack margins.

What is becoming clearer is that BOPO and BOGO are now expressing two completely different stories for renewable fuel traders. BOPO surged toward +$496/mt as July CBOT soybean oil rallied to 74.23 c/lb, equivalent to roughly $1636/mt, while July palm oil remained near $1143/mt equivalent. The spread has now moved from approximately -$175/mt in late 2024 to almost +$500/mt today. This widening is increasingly being driven by the U.S. renewable fuel system rather than tightness in global vegetable oils. D4 RINs continued to hold above 2.235 despite weaker ULSD and crude, while soybean oil call open interest continued building aggressively around the 85 c/lb strike with more than 7200 lots of open interest visible at that level. The U.S. renewable diesel system is effectively creating a domestic premium basin for soybean oil that is disconnected from weaker global palm oil fundamentals.

Palm oil fundamentals meanwhile continue to soften. Indonesian March palm oil stocks rose to 2.568 MMT from 2.03 MMT in February while exports fell to 2.168 MMT from 3.3 MMT and biodiesel consumption declined to 1.056 MMT from 1.14 MMT. Malaysia export estimates for May are running down between 14.5% and 18% month-on-month while Dalian palm olein futures fell between 0.20% and 0.37% today across the forward curve. For biodiesel traders, this divergence is critical because weaker palm oil prices are no longer pulling soybean oil lower as they historically would. Instead, U.S. renewable diesel demand and RIN values are increasingly dominating soybean oil price discovery.

Physical biodiesel values in Europe remained relatively resilient despite the correction in energy. June FAME0 traded around +360 over ICE gasoil with flat prices near $1429/mt FOB ARA. RME traded around +405 over gasoil with flat prices near $1484/mt FOB ARA. UCOME traded around +540 over gasoil with flat prices near $1609/mt FOB ARA. HVO Class II implied flat prices remained near $2440-2510/mt FOB ARA equivalent while SAF implied flat prices were discussed near $2490/mt FOB ARA equivalent. UCOME deals were reported between +545 and +560 over gasoil during the day. The resilience of renewable diesel and biodiesel flat prices despite a 4% crude correction suggests the market still sees biofuels as strategically necessary molecules for balancing the distillate system.

On the agricultural side, China continues to cover soybean needs aggressively. Weekly CFR China soybean cargo trades accelerated again with week 38 showing 43 cargoes traded versus almost no activity earlier in the season. Brazilian farmer selling meanwhile reached 62.5% of the crop versus 69.3% last year, leaving roughly 68 MMT still unpriced. New crop forward sales remain slow at only 8.5% sold versus 11.2% last year and 16.0% two years ago. For renewable diesel producers, this matters because feedstock availability and farmer selling behavior increasingly influence forward soybean oil optionality and crush economics.

The broader market signal tonight is that crude is attempting to price geopolitical de-escalation and government intervention while distillates, refinery margins and renewable fuel compliance markets continue to price structural tightness. The fact that crude fell nearly 4% while diesel cracks remained near $65/bbl, D4 RINs held above 2.23, BOGO stayed above +570/mt and UCOME flat prices remained above $1600/mt FOB ARA suggests the market still sees biodiesel and renewable diesel as essential balancing components of an increasingly stressed distillate market.