Physical Markets Ignore Iran Headline Driven Collapse As Europe Moves To Support Biofuels

Distillate inventories fell another 1.3 million barrels in the US to 102.3 million barrels while Fujairah heavy fuel inventories dropped 7.7% to just 2.82 million barrels despite a $107/mt collapse in ICE gasoil triggered by another fake Iran deal headlines.

Energy markets suffered one of their sharpest intraday liquidations of the year during European trading hours following reports that Washington was nearing a possible framework agreement with Iran. ICE gasoil June fell as much as $107.50/mt intraday before recovering part of the losses during the US session to settle at $1,187.25/mt, down $65.25/mt on the day. Brent June fell over $4/bbl to $114.01 while WTI June dropped $7.10/bbl to $95.17 before also recovering from session lows.

Despite the outright liquidation in flat price, physical structures remain historically tight. ICE gasoil June/December backwardation still settled near +$295.75/mt while July/December closed around +$193.50/mt. Brent June/August backwardation widened further to over +$20/bbl despite the collapse in front month flat price. Reuters meanwhile reported that maritime traffic through Hormuz remains near standstill despite isolated vessel movements, impacting close to 20% of global oil and gas flows.

Physical inventory data directly contradicted today’s liquidation narrative. Fujairah heavy fuel inventories fell another 7.7% week-on-week to only 2.82 million barrels, equivalent to roughly 440,000 mt, one of the lowest levels seen in recent years for a key global bunkering and redistribution hub. HSFO backwardation widened again while 380 CST HSFO cracks moved back above +$3/bbl. Middle East exports into Asia also remain constrained.

US inventory data painted a similar picture. Distillate inventories fell another 1.3 million barrels to only 102.3 million barrels and now sit 11.2% below the 5-year average. Jet fuel inventories also declined to 43.6 million barrels and remain 3.5% below seasonal norms. Gasoline inventories meanwhile increased 2.5 million barrels and are now 7.1% above the 5-year average. Total petroleum inventories excluding NGLs remain 16.5% below the 5-year average. The US Strategic Petroleum Reserve remains near 393 million barrels versus levels approaching 650 million barrels only a few years ago, despite another weekly draw of roughly 5.2 million barrels.

Against this backdrop, governments are increasingly reconsidering biofuels through the lens of fuel security rather than solely carbon policy. Germany’s UFOP this week openly supported proposals to exempt biofuels used in agriculture from fuel taxes following disruptions linked to the Middle East conflict. UFOP specifically stated that recent events demonstrated how quickly supposedly secure energy supply chains can become vulnerable. Australia simultaneously is discussing national biodiesel and ethanol mandates while allocating roughly A$10 billion toward strategic fuel stockpiles and permanent reserve infrastructure.

The relative price action in biofuels strongly reflected this transition. While ICE gasoil collapsed more than 8% intraday, bean oil fell only around 2%. Front month BOGO exploded 16.5% higher to +$505/mt while June BOGO rose toward +$573/mt. Deferred BOGO structures remain near +$650/mt into winter 2026-27. Bean oil expressed as a percentage of ICE gasoil surged back to 142.5% for the prompt month and above 170% into deferred periods.

BOPO meanwhile collapsed nearly 7% on the day to near +504/mt as palm oil significantly underperformed bean oil. Palm oil itself fell nearly 5% while bean oil losses remained closer to 2%. The move likely reflects expectations that weaker outright crude prices could pressure discretionary Southeast Asian biodiesel economics while methanol and financing constraints continue limiting aggressive biodiesel expansion in the region. Nonetheless BOPO remains historically elevated.

BOPO weekly

US biodiesel economics remained supportive for conventional biodiesel producers. Conventional biodiesel crush margins remained positive across the curve with June margins still near +54 c/gal despite the collapse in heating oil and ULSD. Renewable diesel economics however remained slightly negative ex-45Z due to higher feedstock intensity and weaker relative credit capture.

European physical biofuel markets also remained resilient despite the collapse in ICE gasoil. FAME 0 outright values traded near $1,408/mt while RME held around $1,456/mt. UCOME remained near $1,580/mt while HVO Class 2 held close to $3,000/mt and SAF near $2,960/mt. UCOME premiums versus ICE gasoil settled near +$285/mt while RME premiums held around +$161/mt. These remain historically elevated replacement fuel premiums even after today’s liquidation.

Another important signal came from physical crude markets themselves. Reuters reported weaker differentials for CPC Blend and Azeri BTC cargoes due to softer Asian demand and unsold barrels, yet there were still no bids or offers in the Platts window for Urals, CPC or Azeri grades. Trade is broken by high volatility.

Reuters also reported that direct diesel sales in Brazil surged from only 1.1 million liters in the previous quarter to 22.39 million liters in Q1 following Petrobras’ agreement with Vale, highlighting increasing emphasis by large industrial consumers on securing direct fuel supply.

What today’s market action ultimately demonstrated is that crude flat price and physical fuel security are continuing to no longer move in lockstep. Even after a historic liquidation in ICE gasoil, US distillate inventories remain 11.2% below the 5-year average, Fujairah inventories continue collapsing, Brent backwardation remains above +$20/bbl and BOGO surged another 16.5% higher. Governments increasingly appear to be recognizing that biofuels represent one of the few scalable domestic tools available to offset structurally dependency of tight diesel and jet balances.