Gasoil Breaks Lower but Options Market Signals Immediate Supply Risk

Energy markets reversed sharply on headlines that the Strait of Hormuz remains open, with Brent down $11.12 or 11.2% to $88.27 per barrel and WTI down $11.40 or 12% to $83.29 per barrel. ICE gasoil fell $128 per metric ton or 10.9% to $1,046.75 per metric ton, while the May December spread compressed from $318.75 per metric ton to $242.50 per metric ton. The move removes a large portion of geopolitical premium, but it reflects headlines rather than a confirmed normalization in flows.

The defining signal today comes from the gasoil options market. There was unusually heavy volume in otm May calls across the $1,500 to $2,000 per metric ton strikes, with total traded volume around 21,000 contracts and implied volatility above 120%, while at the money volatility dropped into the 80s with only 19 days left to expiry. Open interest across those strikes still stands near 12,000 contracts. This indicates a combination of short covering and new positioning rather than a full exit. Participants reduced some exposure to extreme upside risk but maintained a significant residual position. Despite the collapse in flat price, the market continues to assign a meaningful probability to a sharp upside move in the near term.

In the ARAG window, pricing confirms that the sell off is being driven by paper rather than physical. FAME 0 traded up to $1,378 per metric ton, RME reached $1,436 per metric ton, and UCOME printed as high as $1,564 per metric ton. These levels correspond to premiums of roughly $200 to $400 per metric ton over gasoil, broadly in line with recent sessions. Gasoil settlement moved from $1,365 per metric ton earlier in the month down to $1,175 per metric ton, yet bio premiums remained firm. The flat price adjustment in biodiesel is almost entirely explained by the drop in gasoil rather than any weakening in underlying demand. UCOME continues to command a premium to RME reflecting its higher greenhouse gas savings, while HVO Class 2 remains elevated above $2,800 to $2,900 per metric ton, maintaining a spread of more than $1,200 per metric ton versus gasoil.

Soybean oil corrected to 68.16 cents per pound or $1,502 per metric ton, down about $25 per metric ton, yet BOGO widened sharply to $455.91 per metric ton, up over $100 per metric ton on the day due entirely to the collapse in gasoil. BOHO expanded to $1.68 per gallon. Diesel remains the anchor for the complex, and volatility in distillates is now driving margin swings across biofuels.

Breaking the crush into renewable diesel and conventional biodiesel highlights the current dislocation. Renewable diesel margins have turned negative, with June near minus $0.15 per gallon and remaining negative forward. Conventional biodiesel remains positive at $0.30 to $0.50 per gallon. The spread between the two is now roughly $0.40 to $0.50 per gallon in favor of FAME before 45Z. Renewable diesel is more exposed to ULSD and reacts directly to the collapse in heating oil, which fell roughly $0.40 per gallon.

Feedstock geography reinforces this divergence. Interior plants benefit from weaker local basis and lower input costs, allowing them to maintain positive margins. This split explains why production does not shut uniformly and why marginal barrels are concentrated at the Gulf.

D4 RINs continue to rise with June at 1.861 and December at 1.873. Market estimates suggest levels closer to $2.15 may be required to restore margins and incentivize production, particularly for higher cost producers. This is consistent with a system where marginal supply remains under pressure despite lower flat prices.

In global vegetable oils, palm oil remains stable near $1,137 per metric ton with production expected to rise 3% to 48 million tons while stocks decline 3% to 4.3 million tons. The lack of downside in palm versus the sharp drop in gasoil this week keeps POGO unecessarily elevated and continues to limit biodiesel blending economics in Asia as methanol cost pressure require a better transformation cost. Remember Apr Gasoil expired at $1402.25 and we are now at $1051.25!

The key takeaway is that the market has repriced headlines, not risk. The combination of heavy short dated options activity, persistent open interest in high strike calls, firm ARAG premiums, negative renewable diesel margins, and rising RINs all point to a system that remains structurally tight despite the sharp correction in flat price.