Waiting on 45Z: Markets Stretched Ahead of Treasury’s Guidance Carbon Accounting Pivot

U.S. biofuel markets are facing a demand retrenchment just as production remains stubbornly high. The latest data from California’s LCFS shows Q1 2025 renewable diesel use fell by over 140 million gallons from Q4 2024, while biodiesel dropped nearly 15 million gallons. This confirms the steep impact of the expired $1/gal blender's tax credit. The D4 RIN screen closed today at 1.20, while the BOGO spread held strong at +518 $/mt, underlining the continued economic pressure on soybean oil as a feedstock. With oil share still hovering around 50%, and the curve still flat to firm, many in the trade are starting to question whether the soybean oil complex is overbought — especially considering the surge in call option positioning, including over 12,000 open contracts at the 60 strike for December.

Dec Soyoil Call options

In Europe, physical markets remain supported but not explosive. Flat prices for UCOME are stable around 1,458 $/mt, giving healthy gross margins around $200/mt, while RME flat prices also firmed modestly. Still, the European diesel market tone is unconvincing — ICE Gasoil weekly charts look structurally bearish, sitting below the 200-day average, even as Sep/Dec backwardation widened 14% today to +24.75 $/mt. This dislocation between flat price and curve structure reflects weak diesel fundamentals being masked by curve tightness. Volumes on the European paper market were lower last week, and spot window deals remain concentrated in UCOME and RME, with little follow-through. Meanwhile, German FOB vegoil values are slipping — rapeseed oil is offered down to €1,035/mt FOB mill, and Dutch soy oil for Oct-Nov delivery dropped to €1,130/mt.

Gasoil ICE futures

In Asia, the softness in palm oil continues to weigh on the broader vegoil complex. Malaysian benchmark futures drifted lower again, and despite a slight rebound in POGO to ~309 $/mt, the overall curve remains heavy. Chinese buyers, meanwhile, continue to book Argentine soymeal cargoes, signaling increased interest in South American supply, which is now at a significant discount to domestic. The third deal since June suggests a tactical restocking by feedmakers as tax reforms improve Argentine export competitiveness. At the same time, China has been actively selling soyoil cargoes to India, reversing traditional trade patterns. This dynamic — where China imports soymeal while exporting soyoil — marks a radical reordering of global commodity flows and is reshaping crush margins and trade flows across the Pacific. Palm oil producers are increasingly nervous about oversupply, currency swings, and poor discretionary demand outside of India.

One of the most consequential policy debates, however, remains around co-processing under the U.S. 45Z tax credit. While co-processing is already allowed under the EU’s RED II/III framework via mass balance accounting, the European system assigns used cooking oil (UCO) a default CI of zero — meaning it contributes no carbon penalty but also no added reduction beyond satisfying a quota, with the main benefit being eligibility for double counting toward blending mandates. In contrast, under the U.S. GREET model, UCO typically carries a negative carbon intensity score, often in the range of –30 to –40 gCO₂e/MJ, depending on upstream logistics. This distinction is critical: under GREET, co-processing even a small fraction of UCO into a fossil crude stream can significantly lower the CI of the entire fuel pool, especially if paired with green hydrogen and renewable electricity. If Treasury allows such co-processing under 45Z, the impact could be revolutionary — effectively monetizing the carbon benefits of UCO directly via tax credits, not just regulatory compliance. This would disconnect feedstock volumes from compliance value and elevate CI as the principal economic driver, challenging the prevailing assumption that soybean oil must dominate the next phase of renewable diesel growth.

In summary, this is a market caught between policy ambiguity, structural oversupply in agricultural commodities, and evolving carbon valuation mechanisms. Traders should stay alert — the shape of demand could shift radically once 45Z rules are finalized. Positioning in soybean oil, and to a lesser extent in tallow and corn oil, may not reflect this coming pivot. With Congress now in recess through early September, no immediate legislative clarity is expected, further compounding the uncertainty and increasing the importance of the Treasury’s forthcoming guidance as the next major inflection point.