Physical Tightness Crushing Deferred Energy Structure

US crude and fuel inventories continue to collapse at a pace well beyond 2022 despite outright energy futures undergoing a violent correction. June WTI expired near $107.77/bbl while July WTI settled near $98.35/bbl, leaving a nearly $9.40/bbl premium for prompt physical crude. That type of structure reflects acute prompt scarcity tied directly to collapsing Cushing inventories, which recently rebounded toward 30 million barrels but still remain historically low versus the 60-70 million barrel levels seen during 2015-2020. Commercial US crude inventories reportedly fell another 7.9 million barrels this week while combined commercial plus SPR inventories dropped 17.8 million barrels. HFI estimates total US liquids inventories near 1.236 billion barrels, already roughly 55-60 million barrels below comparable 2022 levels despite materially higher prices.

The gasoline side remains particularly constructive. US gasoline inventories have fallen toward 214 million barrels versus roughly 240-260 million barrels during the same period in 2022-2024. HFI Research noted API likely overstated last week’s gasoline draw of 5.8 million barrels, but even adjusted figures still point toward persistent tightening ahead of Memorial Day demand. The key point is that inventories continue declining despite nationwide gasoline prices near $5/gallon and diesel prices near $6/gallon in many regions. Demand destruction still appears limited while US exports are strong. Surprising that US Admin not restricting exports to avoid another rise in pricing.

The ICE gasoil market corrected sharply with front month June gasoil settling near $1,151.50/mt, down roughly $52.75/mt on the session. However, the deferred structure remains historically extreme. June/December gasoil still held near +$227/mt while June/September remained near +$115/mt. The front June/July spread narrowed sharply toward +$22/mt from much wider levels earlier this month. Some easing appears linked to expectations that additional Russian crude cargoes are again finding pathways into Europe through temporary waivers and refinery workarounds, though broader EU sanctions officially remain in place. Even after the correction, June/December gasoil backwardation remains near levels normally associated with severe physical tightness.

Gasoil

The broader energy complex corrected aggressively with July Brent down $6.27/bbl to $105.01 and July WTI down $5.80/bbl to $98.35. Yet backwardation structures remain elevated. June WTI versus December widened further to +$26.42/bbl while June versus August traded near +$17.88/bbl. That structure continues to signal immediate prompt scarcity rather than surplus conditions.

Technically, ICE gasoil increasingly resembles the 2022 blowoff structure where prices peaked above $1,500/mt before collapsing back below $700/mt over the following year. The difference today is inventories. In 2022 inventories were rebuilding relatively quickly after the initial Ukraine shock. Today inventories continue drawing aggressively even with gasoil near $1,150/mt and WTI near $100/bbl. That makes the current setup structurally tighter despite similar chart behavior.

European biodiesel also corrected heavily alongside gasoil. FAME 0 fell to roughly $1,460/mt FOB ARA while RME declined toward $1,514/mt and UCOME toward $1,632/mt. Despite the correction, margins remain profitable. RME still carries roughly a $304/mt premium over gasoil while UCOME maintains a premium near $422/mt. HVO Class II traded near $2,934/mt flat price FOB ARA, still carrying an escalated premium near $1,272/m3 over gasoil swaps.

The forward diesel curve remains supportive for biofuels despite weaker outright energy pricing. BOHO strengthened materially with June BOHO rising toward 1.7550 while deferred structures also improved. BOGO remains elevated with July bean oil versus July gasoil near $511/mt and December BOGO near $609/mt. Bean oil expressed as a percentage of gasoil recovered toward 145% for July versus roughly 165% for deferred winter contracts. Conventional biodiesel crush margins remain profitable near $0.79/gallon for summer production while RD screen margins dropped sharply toward $0.26/gallon due to weaker heating oil futures.

US D4 RINs continue moving higher with June D4 futures above $2.08/RIN while December traded near $2.10. The continued rise in RIN pricing despite weaker flat price energy indicates the market remains concerned about compliance barrel availability into 2027.

For biodiesel traders, soybean planting progress remains one of the most important agricultural variables because it directly affects future US soybean oil availability. US soybean planting reached 67% complete versus a 5-year average of 53%, while soybean emergence reached 32% versus a 5-year average of 23%. Historically, early and rapid planting tends to correlate with larger soybean yields because crops benefit from a longer growing season and typically avoid part of the late summer heat stress during pod filling. That helps explain why deferred bean oil contracts corrected less aggressively than energy despite the broader liquidation. The market increasingly assumes that if weather remains cooperative, the United States could still produce a large soybean crop later this year even while nearby diesel and feedstock markets remain structurally tight.

China remains the bearish counterweight in vegetable oils. Combined Chinese palm oil, rapeseed oil and soybean oil inventories were estimated near 2.0 million tonnes for the week to May 15, up from 1.97 million tonnes the prior week. Chinese palm oil inventories increased toward 820,000 mt while soybean oil stocks also hovered near 820,000 mt. Those large inventories increasingly reflect weak domestic demand conditions rather than supply shortages. Chinese retail sales reportedly rose only 0.2% year-on-year in April while domestic automobile sales fell 21.6% year-on-year. Property weakness and persistent deflationary pressure continue weighing on consumer demand in China, reinforcing concerns that the Chinese economy is weaker than headline growth figures suggest. The other concern is the increasing 30-year yields across the board in US, Japan, France and UK - all heavily indebted economies.

That weakness helps explain the poor palm structure despite Indonesia attempting to centralize commodity exports. POGO remains deeply negative nearby with June POGO near -$35.84/mt and July near +$16.28/mt before steeply recovering toward +$236/mt by December. Weak Malaysian palm exports, large Chinese vegetable oil inventories and the weak Indian rupee continue limiting nearby export demand despite Indonesian rhetoric about tighter state control over palm exports. Indonesian President Prabowo’s comments about centralizing palm and coal exports therefore had limited immediate bullish impact on flat price structure.

Overall, the market increasingly looks bifurcated. Financial energy futures corrected sharply on recession fears and positioning liquidation, but physical inventories continue tightening at rates more consistent with crisis conditions. As long as US liquids inventories continue drawing toward 2022 lows while prompt crude backwardation remains near $25-26/bbl, the broader distillate complex likely remains structurally supported despite extreme volatility.

Traders should also keep seasonality and contract structure in mind. Historically, Brent expiry toward month-end often coincides with temporary weakness in ICE gasoil as crude structure relaxes and physical cargo positioning eases after expiry pressure passes through the system. That pattern partly resembles what is occurring now with the sharp narrowing in front gasoil spreads and liquidation across prompt energy contracts. However, the current geopolitical backdrop remains unusually unstable compared with normal expiry cycles. Hormuz disruption risks, historically low US liquids inventories, elevated distillate backwardation and ongoing uncertainty around Russian flows into Europe continue limiting confidence that this correction represents a durable top in middle distillates.