The Petroleum Market Priced Peace This Week While Inventories Running Low. The Biofuels Market Priced Policy And Gets Sticky

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The final trading day of the week highlighted an increasingly unusual disconnect between petroleum and biofuels markets. July ICE Gasoil settled at $1,019.50/mt, down $12.50/mt on the day, while Brent crude fell $1.72/bbl to $91.99/bbl as traders continued to price headlines suggesting progress toward a possible Iran ceasefire and eventual reopening of the Strait of Hormuz. Yet the physical market continues to send a very different signal. U.S. distillate inventories reportedly fell to their lowest level since 2003, Jul-Dec Brent remains backwardated by $24.41/bbl, and Jul-Dec gasoil continues to trade at a substantial $126.75/mt premium. The market appears to be pricing peace before any agreement has actually been signed.

Distillate & Fuel oil inventory data

For biofuels traders, the most dramatic chart of the week was renewable diesel profitability. The RD screen crush margin collapsed to just 8.8 c/gal on Friday, down from roughly 80 c/gal in mid-May. In less than two weeks, nearly $216/mt of theoretical margin has evaporated as diesel futures fell while feedstocks continued to strengthen. The decline is particularly striking because policy values moved in the opposite direction. D4 RINs climbed to 2.36, their highest level in years and roughly 63% above March levels near 1.45. Physical diesel economics deteriorated sharply this week, but policy economics became even more supportive.

RD Screen Crush Margin

The soybean oil market continues to ignore weakness in the energy complex. July soybean oil closed at 77.72 c/lb, up 1.33% on the day and more than 25% above levels seen three months ago. BOGO expanded to $702.67/mt while BOPO reached $562.17/mt. Historically, BOGO reaches these levels during periods of sharply rising diesel prices. This time the spread is widening because soybean oil continues to appreciate while diesel prices fall. The chart is approaching levels previously observed during the renewable diesel boom of 2021 when BOGO briefly approached $1,000/mt. If D4 RINs continue to rise and no meaningful relief arrives through imported feedstocks or regulatory adjustments, the market could revisit those historical extremes. Either diesel futures are underestimating physical tightness or soybean oil is overestimating the durability of current policy support.

BOGO - July

Palm oil remains the notable exception within the vegetable oil complex. August Malaysian palm oil futures recovered to 4,535 ringgit/mt and closed back above the important 4,500 level, while Indonesian June CPO futures traded near $1,151/mt. Indonesia reduced its June CPO reference price to $1,029.51/mt from $1,049.58/mt, lowering export taxes and improving export competitiveness. Even so, soybean oil maintains an extraordinary premium over palm. While soybean oil is increasingly trading U.S. policy, RIN values and renewable fuel economics, palm oil remains anchored to traditional supply and demand fundamentals. With both Malaysian production and exports expected to decline month-on-month, palm oil is not bearish. Palm is simply not participating in the same policy-driven rally currently dominating soybean oil.

Another reason for caution on the recent peace headlines is timing. Much of the Muslim world is currently focused on the Eid holiday period, which concludes this weekend. Meaningful negotiations are more likely to resume next week when political and diplomatic attention returns to the region. The market appears to be pricing a relatively smooth path toward a broader agreement, but soybean oil is sending a different message. July soybean oil finished the week at 77.72 c/lb, D4 RINs reached 2.36, and BOGO surged above $700/mt. Those are not the price signals one would normally associate with a market fully convinced that geopolitical risks are about to disappear. My assessment remains that the current ceasefire is more likely to be extended than converted into a comprehensive settlement. Until the underlying political differences are narrowed substantially, commodity markets are likely to retain a meaningful geopolitical risk premium.

European biofuel markets reflected the uncertainty. Trading activity in biofuel paper fell sharply from 752,000 mt in Week 20 to just 354,000 mt in Week 21 as participants stepped back from the market. Physical values remained relatively resilient with RME trading around $1,513/mt, FAME 0 around $1,473/mt, UCOME around $1,658/mt and HVO Class II around $2,826/mt despite the weakness in diesel futures.

The week ends with a clear divergence. Petroleum traders are focused on ceasefire headlines and the possibility of additional barrels returning to the market. Biofuels traders remain focused on D4 RINs, feedstock availability, renewable fuel mandates and the prospect that soybean oil demand remains structurally stronger than many expected. For now, policy continues to outweigh petroleum speculation. Next week will be critical for pricing as we are running on fumes in Distillates.