Trump-Xi Summit Lull Fails to Break Distillate Tightness

Energy markets traded lower on Wednesday as traders reduced risk ahead of the Trump-Xi summit and Europe moved deeper into another holiday-shortened trading week. May remains fragmented by public holidays across Europe, reducing liquidity and slowing participation across both energy and biofuels.

WTI June fell to $101/bbl while Brent June settled at $106.06/bbl. ICE gasoil June dropped $29.25/mt to $1,178/mt. Despite the correction in flat price, the underlying structure remains historically tight. June/December ICE gasoil backwardation remains at +$250/mt while Jul/December accounts for +$212/mt indicating that market expects situation to persist through summer. Those remain extreme backwardation levels that continue to signal an undersupplied middle distillate market.

The softer tone appears tied more to diplomacy and positioning than to improving balances. Early commentary surrounding President Trump’s visit to China focused heavily on commercial relations and agricultural trade rather than geopolitical confrontation. Agricultural markets are already attempting to anticipate possible Chinese purchases ahead of the summit.

At the same time, the latest EIA global energy flow data showed oil flows through the Strait of Hormuz dropping roughly 30% to 14.6 million bpd in Q1 2026 from around 20.4 million bpd in Q1 2025. LNG flows through Hormuz also declined sharply. The remarkable aspect is that diesel markets remain tight even after global supply chains have partially adjusted to reduced Middle East throughput.

US inventories continue to reinforce the bullish distillate narrative. Crude inventories reportedly fell 4.3 million barrels this week while gasoline inventories dropped 4.1 million barrels. Combined US gasoline and diesel inventories remain near 320 million barrels versus nearly 390 million barrels seen in 2021. Strategic Petroleum Reserve inventories also declined another 8.6 million barrels. Remarkable that prices in the US are not higher.

Refining economics remain exceptional. US 3:2:1 crack spreads traded above $56/bbl while heat cracks remain near historically extreme levels at nearly $70/brl. Jet fuel continues to be the strongest part of the barrel with Los Angeles jet fuel near $4.56/gal and Northwest European jet cargoes above $1,340/mt.

Ironically, these extreme distillate margins are also working against political momentum for E15 expansion. Refiners currently maximize profitability by prioritizing diesel and jet production rather than increasing gasoline pool blending economics. The stronger the distillate market becomes, the less incentive refiners have to support policies focused primarily on expanding gasoline blending. Speaker Mike Johnson also indicated the E15 vote would be handled as a conscience vote rather than being heavily whipped along party lines, reflecting continuing political sensitivity around the issue.

This remains structurally supportive for biofuels because renewable diesel, biodiesel and SAF increasingly function as extensions of the distillate pool itself. The latest EIA Short-Term Energy Outlook quietly reinforced this trend by increasing its 2027 forecast for “other biofuel production” by 10.4% month-on-month to 810 million gallons. This category includes SAF, renewable gasoline, renewable propane and renewable heating oil. US renewable diesel production is now projected at 294kbd in 2027 versus 190kbd in 2025.

In Northwest Europe, physical biodiesel premiums remained elevated despite weaker gasoil futures. Based on Tuesday’s Argus indications and Wednesday’s ICE gasoil settlement near $1,178/mt, implied flat prices remained historically high across the complex. FAME 0 traded near +$300 over gasoil implying flat prices around $1,478/mt. RME traded near +$329 over gasoil implying flat prices around $1,507/mt. UCOME traded repeatedly at +$395-400 over gasoil implying flat prices around $1,573-1,578/mt. HVO Class II traded around +$1,325-1,330 over gasoil implying flat prices near $2,503-2,508/mt. SAF indications near $1,280/m3 imply flat prices still near $2,450/m3 equivalent territory depending on density assumptions and conversion methodology.

European feedstocks also remained resilient. Dutch FOB soyoil traded around €1,155-1,165/mt while Dutch rapeseed oil held near €1,210-1,255/mt. Nearby rapeseed oil structure remains backwardated despite today’s weaker energy environment.

ICE paper activity remained elevated with approximately 99kt trading in HVO, 33kt in RME and 12kt in UCOME. UCOME/FAME spreads continue holding near historically elevated levels around $135/mt.

Palm oil remains the weakest part of the global vegetable oil complex. Malaysian palm oil futures were largely unchanged around MYR 4,700-4,750/mt while soybean oil continued to outperform aggressively. Indian April palm oil imports fell 25.5% year-on-year to 513k mt while sunflower oil imports surged 121% and soybean oil imports increased 25.5%. Total Indian edible oil stocks nevertheless rose to 2.123 million mt from 1.894 million mt last year.

The most important chart in vegetable oils currently remains weekly BOPO. July BOPO traded near +$549/mt today after spending much of the last decade fluctuating closer to parity or within a much narrower premium structure. The current level now approaches the extreme peaks seen during the 2022 global energy crisis. This is no longer a simple food oil spread. The market is effectively repricing soybean oil as a domestic US energy molecule tied directly to renewable diesel economics, D4 RINs and LCFS incentives, while palm oil remains tied primarily to food demand and Asian import flows.

POGO tells a similar story. Nearby May POGO remains negative near -$65/mt while deferred structures explode higher, with December POGO above +$236/mt and February 2027 near +$253/mt. The forward market continues to price tightening distillate balances well beyond the current correction in outright crude.

In the United States, D4 RINs continue signaling structural tightness rather than temporary dislocation. June D4 RINs traded above $2.06 while December traded near $2.084. Conventional biodiesel screen crush margins remain positive around 57-72 cents/gal depending on tenor despite weaker heating oil futures.

The soybean oil market continues to decouple from global vegetable oil pricing. Nearby July bean oil briefly traded above 77 c/lb while deferred contracts softened. July/November bean oil spreads widened to +2.24 c/lb while Jul/Dec backwardation held near +4.36 c/lb. At the same time, Brazilian FOB soybean oil values remain deeply discounted versus CBOT, highlighting the growing disconnect between US domestic biofuel policy economics and global physical vegetable oil supply.

For now, summit diplomacy, holidays and profit-taking have slowed outright energy momentum. Yet the structure underneath the market continues pointing toward extremely tight middle distillate balances heading into summer.