G7 diesel release could pressure renewable diesel and biodiesel margins

The G7 agreed to release 100 million barrels of reserve diesel. The producers who make fuel from soybean oil or used cooking grease instead of crude have reason to watch it.

Renewable diesel and biodiesel only pencil out when petroleum diesel is expensive enough to carry the gap between the fuel's price and the cost of the feedstock. Drop 100 million barrels of government-held diesel into the market and that gap narrows. A blender has less reason to cover the premium on a renewable gallon, and a producer running a plant on feedstock that costs more than crude sees the math get tighter.

Why a diesel release reaches biofuels

Biofuel economics live on the spread between what the fuel sells for and what the feedstock costs. Petroleum diesel sets the sell-side price. Push petroleum diesel down with a large coordinated release and renewable diesel prices fall with it.

That could squeeze margins at renewable diesel plants that signed up for feedstock when the spread looked wide. It may also soften demand for blending credits, since the pull to stretch a barrel with biofuel eases when the barrel itself gets cheaper. None of that is certain, and the size of the effect depends on how fast the 100 million barrels actually lands and how long it stays in the market.

What a hauler feels

The hauler is at the end of the chain. A release aimed at cooling diesel prices helps a hauler on the cost side, whatever it does to producers upstream.

For a jobber supplying that hauler, cheaper diesel at the rack helps volume and hurts anyone whose margin depended on the renewable premium holding up.

What to watch

The timing and pace of the 100 million barrels is still open. The effect on biofuel spreads depends on how much reaches the market and when.

Watch whether biodiesel and renewable diesel producers pull back on feedstock buying if petroleum diesel softens, and watch the blending economics at the rack. If the spread stays narrow, some higher-cost plants could idle. If the release is slow or small, the pressure may not amount to much.