Policy Support Carries EU Policy the While Fundamentals lag

Europe enters a decisive quarter for RED III because national transposition, not EU level ambition, determines real biofuel demand. RED III is a directive and does not apply automatically. Each member state must transpose it into domestic law. The legal deadline for transposition was 21 May 2025. Several large member states missed this deadline and still operate under legacy RED II based frameworks. Missing the deadline does not suspend RED III obligations. It increases uncertainty because once transposition occurs, the new rules apply to the compliance year defined in national law, often with retroactive accounting impact.

For biofuels, four policy milestones matter in this quarter. First, national transport targets. Under RED III, member states must implement either a 14.5 percent GHG intensity reduction or a 29 percent renewable energy share in transport by 2030. The slope of those targets from 2026 onward determines near term demand. Differences in national trajectories translate into several million tons of annual biofuel volume across the bloc.

Second, crop based fuel treatment. RED III caps crop based fuels at 7 percent of final energy consumption in road and rail, with discretion for lower national caps. Draft national texts in several countries point toward effective caps closer to 5 to 6 percent by 2027. Once transposed, these caps apply directly to compliance math and reduce blending headroom for RME and FAME even if physical supply remains available.

Third, double counting. Germany has completed transposition and eliminated double counting for advanced biofuels. This removed a mechanism where one physical ton previously counted as two toward compliance, cutting accounting value by 50 percent. Germany represents roughly 20 percent of EU road fuel demand. Once a market of that size applies stricter rules, other member states face pressure to align or risk cross border arbitrage. Countries still retain the ability to delay transposition, but delay compresses risk and raises the probability of abrupt repricing once laws are finalized.

Fourth, POME. Palm oil mill effluent will be excluded from RED III compliance from 2027. Even though eligibility remains in 2026, transposition forces governments to define transitional treatment. Obligated parties already discount forward POME exposure rather than wait for a hard cutoff. This keeps scrutiny high on palm linked pathways during 2026.

ARAG window results reflect this regulatory backdrop. Using front month gasoil at 612 dollars per metric ton as the reference, flat prices confirm a clear shift in relative value. Rapeseed oil now trades at roughly a 50 euro per metric ton discount to soybean oil in Northwest Europe. As April 1 approaches and summer blending begins, this discount improves RME economics and challenges the durability of crop based premiums. European paper activity starts slowly in week 2, which fits seasonal patterns, but the composition matters. Most hedging concentrates in UCOME and HVO2 rather than RME, pointing to compliance driven positioning rather than margin conviction.

HVO Class I remains an anomaly. Crop based HVO trades near the low 1200s per metric ton, versus UCOME in the high 700s and RME around 800 to 825. Feedstock economics do not justify this spread. The premium reflects drop in flexibility and regulatory optionality. As double counting disappears and the POME ban approaches, this premium looks exposed unless policy tightens further in its favor.

The United States shows renewed policy activity. Stakeholder meetings in Washington have resumed around energy supply and biofuels, while refiners appear absent from formal discussions. Participants skew toward commodity traders, marketers, agricultural interests, and financial intermediaries. This matters for timing and credibility. Dialogue exists, but execution signals remain limited. At the same time, Washington is engaging traders on Venezuelan crude flows. Discussions cover 30 to 50 million barrels, equivalent to roughly 80 to 135 thousand barrels per day over a year. This does not shift global balances on its own, but it reinforces a soft middle distillate backdrop.

U.S. biodiesel fundamentals remain weak. Conventional biodiesel screen margins sit around minus 30 to 40 cents per gallon. Without clarity on 45Z implementation or future RVO levels, obligated parties hedge exposure rather than commit to incremental physical demand. Policy discussion has resumed, pricing support has not.

Indonesia offers the clearest example of policy stepping in to defend prices, and vegoil spreads show it. POGO for March sits near plus 400 dollars per metric ton, while BOPO for March has compressed to roughly plus 80 to 90. This divergence signals stress concentrated in palm rather than across the vegoil complex. Jakarta is pulling several levers at once. Export levies are under review, biodiesel blending already sits at B40 with preparation for B50, and land seizure actions inject uncertainty into plantation ownership and output planning. Indonesia consumed 14.2 million kilolitres of palm based biodiesel in 2025 and plans about 15.6 million kilolitres this year. The widening POGO spread reflects regulatory and political risk premia rather than physical scarcity, while BOPO compression reinforces the view that soybean oil remains heavy.

Soybean oil sits on the opposite side of the spectrum. South American supply looks ample, logistics function well, and balance sheets remain heavy. Bean oil as a percentage of gasoil sits near the upper end of its range at 1.77 for March and 1.82 for May. If gasoil stays weak, this implies a bean oil price adjustment of roughly 10 percent to return toward the 1.60 area.

Energy offers little support. Middle distillate structures remain soft, cash differentials hover near recent lows, and refinery margins stay under pressure. Across regions, policy props prices while fundamentals lag. Once regulatory uncertainty clears, markets will need real demand or tighter balances to justify current premiums.