The RFS Island: D4 Near 2.00, Paranaguá FOB Soyoil –2000

ICE gasoil structure continues to define the market. May Dec remains above +340 with prints near +350, while Singapore 10ppm diesel holds around $185/bbl. WTI has softened toward $93 and Brent near $104, but the divergence remains clear. The constraint is not crude. It is clean products. With backwardation at these levels, prompt barrels remain scarce and biodiesel pricing continues to be anchored by distillate tightness.

D4 RINs reflect that constraint with Dec26 trading around 1.92. The market is still pricing a tight domestic balance under higher RVO expectations. Biodiesel margins have started to compress as feedstocks catch up. Soybean oil is now near 71.5 c/lb, or about $1,580/mt, which has reduced front month conventional margins while forward margins remain pressured by inverted structure. Backwardation or inverse remains strong particularly on Jul/dec soyoil at +5.41 while May/Jul is +0.60! The market is not pricing potential SouthAmerican Soyoil imports for food use.

North West Europe continues to confirm the strength in physical markets. Spot barge trades in the ARAG window are still printing at firm premiums over ICE gasoil, which translates into elevated flat prices for RME, FAME 0, and UCOME. The key point is that these are not distressed trades.

They are being done at levels that reflect tight prompt availability, supported by the backwardation in gasoil. At the same time, the bio paper market tells a more cautious story. Total traded volumes dropped sharply from around 880 kt in week 12 to roughly 340 kt in week 14 before recovering toward 500 kt in recent weeks. HVO paper saw the largest contraction, falling from near 300 kt to around 60 kt at the lows before rebounding. UCOME and FAME 0 also saw reduced activity. The recovery in recent weeks suggests participation is returning, but the overall pattern is one of risk reduction and hesitation rather than aggressive positioning.

The global side continues to diverge. Paranaguá FOB soyoil is now approaching –2000 points versus CBOT. At current futures levels, this implies a discount of nearly $50 dollars per ton. Oilshare at 52.6 percent reinforces the distortion. The soybean complex is pricing extreme oil demand in the U.S. while global physical markets are long. The system is not clearing through price. It is clearing through geography.

This is the RFS island in real time. Domestic policy has lifted U.S. values while leaving global balances heavy. The adjustment mechanism is now trade flows rather than futures convergence.

China sits at the center of that adjustment. This week saw roughly 20 cargoes reported CFR China, with Argentina contributing 5 to 7 cargoes. Total activity reached close to 40 cargoes across Brazil and Argentina. Even with that pace, cumulative coverage for the January to August window remains behind last year. Crushers still need to secure about 19 million tons through August, roughly 2 million tons more than the same point last year. That keeps China active in the market but it isn't buying US Soybeans.

At the same time, the U.S. is tightening pressure on China through energy flows. Tankers carrying Iranian crude toward China are being intercepted as part of a broader enforcement effort ahead of a potential mid May meeting between Washington and Beijing. Energy flows are being constrained while agricultural flows are being positioned for negotiation.

The implication is direct. Reduced access to discounted Iranian crude forces China to source more barrels from the open market possibly US barrels, tightening global balances and reinforcing diesel strength. At the same time, increased U.S. soybean exports to China would shift crushing activity into China, creating additional US soyoil supply offshore that could be used for Biodiesel/RD exports to US. Hard for me to imagine at this moment that all these details could be resolved with China in haste and in a middle of a war on May 15.

This is where the arbitrage breaks the island. The risk is not direct biodiesel imports. The risk is displacement. Discounted South American or China-crushed soyoil moves into global food markets and into the U.S. at competitive values. That displaces domestic demand and pushes more U.S. soyoil into biodiesel production, easing the domestic balance without requiring policy change.

There is also a new supply angle emerging. The EPA has approved a pathway for renewable diesel and SAF from sugarcane ethanol under the Summit process, qualifying for D4 RINs. This introduces a non-lipid supply pathway into the system. It does not change near-term balances, but it weakens the long-term dependency on soybean oil and waste oils for D4 generation.

The structure remains clear. The U.S. is tight and supported by policy and distillate strength. The rest of the world is long with deep discounts. Oilshare at 52 percent and Paranaguá near –2000 confirm the imbalance. The next move will come through trade. If China accelerates buying or if a U.S.–China agreement shifts agricultural flows, the pressure on the RFS island increases. Once that boundary moves, the adjustment will be driven by arbitrage and it will move quickly.