Hope Rally or Holiday Mirage? Distillates Still Tight as Biodiesel Markets Refuse to Break

Energy markets reversed sharply lower today as traders aggressively liquidated geopolitical length on headlines centered around internal peace discussions and diplomatic contacts related to the Iran conflict. The problem for bears is that very little hard evidence has emerged pointing toward an actual operational resolution. There are still no confirmed agreements on sanctions relief, Hormuz shipping security, Iranian export normalization, or verified ceasefire mechanisms. At the same time, much of the Muslim world is now entering the Hajj and Eid al-Adha holiday period, which historically slows diplomatic activity and political negotiations across the Gulf region. The selloff therefore appears driven more by reduced immediate escalation fears and speculative long liquidation than by confirmation of restored physical energy flows.

The ICE gasoil structure weakened sharply but remains historically tight. Jun26 ICE gasoil settled near $1024/mt while Dec26 closed near $887/mt, leaving the Jun/Dec backwardation still near +$137/mt. While this is well below the panic highs above +$300/mt seen earlier this quarter, it remains an extremely elevated backwardation structure by historical standards and continues to signal severe prompt distillate tightness. The market is clearly removing some war premium, but not pricing a return to normal balances.

Jun/Dec ICE Gasoil

That interpretation is reinforced by the behavior of adjacent energy markets. US natural gas futures rose 3.6% today to roughly $3.12/MMBtu while LNG exports remain near record highs around 20 Bcf/day. Europe continues absorbing the majority of US LNG cargoes as Russian pipeline gas remains largely absent and Norwegian production capacity remains close to maximum utilization. If traders truly believed a durable peace agreement was imminent and Middle East flows were normalizing rapidly, natural gas and LNG markets would likely be much weaker than current pricing suggests. US LNG exports are stellar as the Iran war and Russian sanctions are putting US infrastructure to work.

For biodiesel traders, the most important signal today was soybean oil resilience relative to crude and gasoil. Despite the deep selloff in petroleum futures, soybean oil did not collapse alongside energy. That divergence matters. Biodiesel and renewable diesel markets increasingly trade as part of the distillate complex rather than simply following flat crude direction. The fact that soybean oil continues to hold relatively firm while gasoil liquidates suggests the market still believes middle distillate balances remain structurally tight underneath the headline volatility.

The physical biodiesel market in Europe reflected that same resilience. In the ARAG window, FAME 0 traded at $418-445/mt over ICE gasoil, giving a flat price near $1470/mt based on front month gasoil around $1037/mt during the window assessment. RME traded around $465/mt over gasoil for a flat price near $1502/mt. UCOME traded heavily between $620-630/mt over gasoil, implying flat prices around $1658/mt. The UCOME/FAME spread remained extremely elevated near $188/mt, highlighting continued tightness in waste-based feedstocks despite weaker outright energy prices.

Renewable diesel and SAF values also remain historically elevated. HVO Class II traded near $1335/mt over gasoil, implying a flat price close to $2835/mt. Indicative SAF values remained above $3000/mt with some quotes near $3050/mt. Those are not prices associated with a relaxed distillate market.

European feedstock markets also remained relatively firm. Dutch FOB rapeseed oil for Jul26 traded near €1300/mt while Dutch soybean oil held around €1120-1125/mt FOB. German soybean oil values were still quoted around €1140-1160/mt FOB Hamburg depending on forward position. The resilience in soft oils despite heavy liquidation in crude reinforces the idea that biofuel demand and distillate scarcity continue supporting the complex underneath the macro volatility.

The broader physical oil market also still looks tighter than headline crude prices imply. China’s crude imports fell from historical averages near 11 mbd to roughly 9.3 mbd in April, with some forward shipping estimates for May and June reportedly dropping toward 6.5-8.0 mbd seaborne arrivals depending on methodology. At the same time, Chinese refinery runs fell sharply. Kpler estimates Asian refinery throughput dropped from roughly 15.7 mbd earlier this year toward nearly 13.3 mbd recently as Chinese refiners cut runs aggressively.

Some traders interpret this as bearish demand destruction. Another interpretation is that China is temporarily managing through the Hormuz disruption by reducing refinery throughput, prioritizing transport fuels over petrochemical feedstocks, and drawing on inland inventories rather than competing aggressively for seaborne crude. That strategy may buy time, but it also suppresses visible crude demand temporarily, creating an artificially bearish signal in flat price oil markets.

US inventories are becoming increasingly important underneath this backdrop. Total US gasoline inventories have now dropped toward roughly 214 million barrels, materially below both last year and the five-year average for this point in the driving season. Combined gasoline, distillate and jet fuel inventories have also collapsed rapidly toward the lower end of the historical range after beginning the year near 430 million barrels and falling toward the low 360s. Those are aggressive draws heading into peak summer demand.

The US Strategic Petroleum Reserve continues drawing as well. Weekly SPR declines recently accelerated toward nearly 10 million barrels per week at one stage. However, there is an important caveat for traders arguing the US is only “weeks away” from fuel rationing. The crude balance itself remains more manageable than the refined product balance because US crude exports have risen sharply above 5.5 mbd while imports remain near 6 mbd. In other words, the real vulnerability is increasingly refining capacity and product logistics rather than absolute crude availability.

That distinction matters for biodiesel and renewable diesel markets. The tighter the refined product system becomes, the more valuable biodiesel blending components become as extensions of the distillate pool. At the same time, high refinery utilization rates increase operational risk. US refiners are already running extremely hard heading into summer demand season. Any major refinery outage, hurricane disruption, unplanned maintenance event, or pipeline issue would likely have an outsized impact on diesel and gasoline cracks because inventories are already depleted.

The White House’s continued Jones Act waivers for foreign-flagged vessels moving crude and products between US ports also reflects ongoing concern about domestic logistics tightness. Roughly 60 waivers have reportedly been granted since March. That is another indication that policymakers still view the physical fuel system as vulnerable despite the recent correction in crude futures.

For biodiesel traders, the key takeaway is that today’s petroleum liquidation appears driven more by positioning and temporary optimism than by confirmed restoration of global energy flows. Distillate structures remain backwardated, renewable diesel and SAF values remain elevated, soft oils remain resilient, and product inventories continue drawing. Until the market sees verified normalization of Hormuz flows, sustained refinery recovery in Asia, and rebuilding of gasoline and distillate inventories, the underlying support for biodiesel and renewable diesel markets remains intact.