Policy Gravity Holds the Line as Margins Diverge Across Regions

Energy markets moved into defensive mode ahead of the weekend, driven primarily by geopolitical risk management and position clean-up. ICE gasoil rallied into January expiry as participants reduced exposure before the weekend. The Jan/Apr backwardation moved nearly 30 percent higher on the day to around $9.50 per metric ton, while the Jan/Jul backwardation widened to roughly $20 per metric ton. This price action reflects pre-weekend covering and expiry dynamics rather than a change in underlying physical diesel balances.

The agricultural signal sits elsewhere, mainly in vegoil structure. March BOGO softened to roughly $472 per metric ton, down close to 2.3 percent on the session. At the same time, the Mar/Jul BOGO contango widened to nearly minus $35 per metric ton. This curve shape indicates the market remains comfortable with forward soy oil availability and continues to price surplus rather than scarcity.

Jan/Mar Soyoil

January soybean oil is now in delivery and liquidity has shifted decisively into March. The carry from January delivery into March is close to $9 per metric ton. On pure economics, this carry works. At a flat soy oil price near $1,085 per metric ton, financing costs are roughly $2 per metric ton per month and storage costs are typically around $2 per metric ton per month. Over two months, total carry costs are close to $8 per metric ton, leaving a marginally positive return.

The absence of aggressive prompt buying is therefore not an economic issue. It is a physical one. Most renewable diesel and biodiesel facilities are not designed with large feedstock tankage. They are built around continuous throughput and finished product logistics rather than feedstock warehousing. Even when carry economics are positive, these plants lack the physical capacity to buy and store multiple months of soy oil.

Upstream, crushers face the same limitation. Soy oil has historically been treated as a by-product, even though it now represents roughly 45 percent of crush value. Soymeal still dominates plant logistics, accounting for about 80 percent of crush yield by volume. Crushers must move oil to keep crushing and to make room for meal, which structurally prevents oil accumulation even when the forward curve pays.

Europe now stands out on margins. In the ARA window, RME traded around a flat price of $1,430 per metric ton, UCOME near $1,390 per metric ton, and FAME in a $1,290 to $1,310 per metric ton range. Using NWE indications for rapeseed oil near €1,050 per metric ton FOB, European RME gross margins versus RSO have improved materially and are now close to $180 to $200 per metric ton, depending on freight and FX. This margin recovery explains the absence of forced producer selling and reinforces the contrast with the U.S. biodiesel market, where margins remain deeply negative.

HVO Class II continues to trade on a separate axis. Flat prices in the mid $2,500s per metric ton leave HVO more than $1,100 per metric ton above UCOME on a flat price basis. This premium reflects regulatory value, scarcity of compliant molecules, and drop-in optionality rather than feedstock tightness. Scarcity is being priced selectively rather than across the entire barrel.

Asia reinforces the surplus narrative, with an important technical caveat. POGO is pricing near $400 per metric ton, roughly $25 per metric ton above the prevailing Indonesian export levy, while the market still awaits a final decision from the Indonesian government. This shows some policy risk is already priced in. However, the weekly POGO chart displays several unfilled gaps below current levels, leaving technical downside open if policy clarity disappoints or if broader vegoil sentiment weakens.

POGO

The central anchor for traders remains the U.S. Renewable Fuel Standard. D4 RINs continue to trade with low volatility, with Dec 2026 futures near $1.19. This stability reflects regulatory timing rather than physical balance stress.

The most likely outcome, assigned roughly a 60 percent probability, remains a controlled delay rather than a bullish resolution. EPA has not finalized the 2026–2027 Renewable Volume Obligations. If final rules are not issued by January 31, the 2025 compliance deadline automatically shifts from March 31 to June 1. This removes roughly two months of front-loaded compliance demand and keeps obligated parties largely sidelined through the first quarter.

On small refinery exemptions, pricing implies partial reallocation. A midpoint outcome around 50 percent suggests roughly 600 to 700 million gallons of additional implied biodiesel demand. This translates to roughly 2.0 to 2.3 million metric tons of biodiesel demand on an annualized basis. Against an annual D4 market of roughly 3 billion gallons, this supports prices without forcing a squeeze.

At current levels, D4 RINs contribute roughly 20 to 25 cents per gallon to biodiesel margins, while spot biodiesel margins remain more than 30 cents per gallon negative. The market is pricing continuity and survival rather than recovery as even adding 45z benefits, you are still surviving unless you import UCO or Tallow.

Treasury policy reinforces restraint. Multiple stakeholder meetings on Section 45Z are scheduled for mid-January, including January 16. These meetings align with proposed rules rather than final guidance. Proposed rules offer direction but no immediate cash impact. Final guidance typically follows 60 to 90 days later, pushing binding clarity into the second quarter.

There is also a political ceiling on RIN prices. The White House has long been uncomfortable with elevated RIN values, which independent refiners view as an implicit tax. History is clear. In 2018, rising RIN prices triggered policy intervention through small refinery exemptions that pushed RINs sharply lower. That precedent continues to shape expectations and caps upside risk.

Foreign feedstocks remain a headline concern, but prices do not support a hard exclusion outcome. If traders expected outright exclusion, D4 RINs would already be materially higher and waste oil differentials would be widening aggressively. Instead, pricing implies tighter documentation and lifecycle scrutiny rather than exclusion, with North American flows central to the balance.

This links directly to Canada and China. Canadian canola markets remain under pressure following Chinese trade actions. A negotiated outcome is likely, potentially tied to electric vehicle policy. Any deal is unlikely to favor Canada. China does not need additional seed oils. Vegetable oil inventories remain ample and domestic crushing margins are positive. Any resumption of canola flows would likely cap upside rather than tighten global balances.

Putting it all together, the message is consistent. Energy markets are firm on pre-weekend geopolitical covering. Vegoil markets remain heavy due to structural storage limits rather than failed economics. Europe shows improving biodiesel margins. Asia reflects surplus with technical downside risk. The U.S. remains constrained by regulatory timing and political limits rather than physical supply.

Under the 60 percent base case, D4 RINs remain range-bound around $1.00 to $1.15. Compliance urgency shifts into the second quarter. Partial SRE reallocation supports prices without destabilising the system. Conventional biodiesel remains under pressure in the U.S., while renewable diesel and SAF retain regulatory optionality value.

This is a stabilising environment, not a bullish one.