Energy Leads Lower While Policy Biodiesel/RD/SAF Urgency Fades

Energy markets continue to lead the complex lower. ICE gasoil front month trades near 599 dollars per metric ton, and the weekly chart now clearly points to the next technical support around 565. The Jan–Apr backwardation has compressed to roughly +7.75 dollars per ton, down from around +50 in November, confirming a structural softening rather than a transient move. Gasoil chart just looks terrible.

Gasoil

Refining economics remain under pressure. The 3:2:1 crack spread is down roughly 30 percent since mid-November. Gasoline cracks have weakened materially, leaving distillate cracks as the only remaining support for refinery margins. At the same time, distillate supply is ample. OECD middle distillate inventories sit near the upper end of the five-year range, while Russian diesel and gasoil exports averaged close to 1.0 million barrels per day in December.

3:2:1 Crack Margin

Refineries continue to run, but the market is long product, and gasoil absorbs the adjustment.

ARAG activity reflected this pressure. Window volumes remained light, and flat prices adjusted lower in line with gasoil. RME traded around the mid-1430s to low-1440s dollars per ton, UCOME near the low-1400s, and FAME closer to the high-1200s. Despite weaker flat price, spreads remained relatively stable, and there was no sign of forced selling. Using rapeseed oil near 1050 euros per ton and euro dollar around 1.17, RME gross margins remain positive in the region of 140 to 160 dollars per ton, reinforcing producer discipline rather than capitulation.

Soybean oil trades heavy alongside energy and supply expectations. CBOT soybean oil sits near 49 cents per pound, below key weekly moving averages. This weakness is consistent with fundamentals. South America is heading into a very large soybean crop, with Brazil and Argentina both pointing to strong output and aggressive crushing. Energy weakness accelerates the move, but crop size supports lower prices.

The key development today is the disconnect between futures and physical. Paranaguá soybean oil FOB premiums remain largely frozen, even as futures trade below 50 cents per pound. Front FOB differentials that were already deeply negative have not widened further. The physical market appears caught offside by the speed of the gasoil decline. Crushers and exporters were positioned for abundant supply, but not for a sharp energy-driven repricing, leaving FOB markets hesitant rather than reactive.

Relative values remain elevated. BOGO still trades near +490 dollars per ton, despite falling flat price. This reflects policy optionality rather than tight physical balance. Without clarity on US RVOs and 45Z guidance, spreads remain supported while outright prices adjust lower.

US compliance markets remain firm. D4 RINs trade near 1.19 dollars, and California LCFS credits hold in the mid-to-high 50 dollar per ton range. These levels do not indicate stress and do not force immediate regulatory action.

That lack of urgency is reinforced by USDA Farmer Bridge Assistance payouts. The 12 billion dollar program distributes support broadly on a per-acre basis, rather than targeting tariff exposure. Soybeans receive roughly 30 dollars per acre, despite bearing the brunt of China tariff impacts. Corn receives materially higher support, in the low-to-mid 40 dollar per acre range, despite record or near-record export performance in 2025. Rice and cotton receive even higher per-acre payments. The structure disproportionately benefits corn-heavy regions while soy growers receive no incremental recognition for tariff damage.

This matters for biofuels policy timing. With cash support flowing into farm incomes ahead of spring planting, political pressure to resolve RVO levels or issue 45Z guidance eases materially. Unless markets break sharply, the administration has room to wait. Current pricing in soybean oil, RINs, LCFS credits, and ARAG margins does not force action before the end of January.

Options markets reflect the same stance. Downside put hedging remains active in March soybean oil, with heavy open interest at the 48 and 50 strikes, while call positioning remains dominant through 55 to 65. Traders hedge energy risk while keeping upside exposure tied to policy timing.

Net takeaway. Gasoil weakness and distillate oversupply continue to drive flat prices lower. ARAG adjusts without stress, supported by still-positive producer margins. Soybean oil weakness aligns with large South American supply, while physical FOB markets hesitate to reprice. USDA payouts blunt political urgency, and without a market break, US biofuel guidance shifts from necessity to discretion.