Crude Oil Steady at High Levels as US Biofuel Shift Reshapes Demand Outlook

Oil prices remain elevated but off their late‑April crisis highs, with Brent holding in the upper double‑digits in EUR terms as markets digest persistent supply risks from the Hormuz disruption alongside a structurally tighter product balance. At the same time, a major U.S. biofuel policy package moving through Congress is set to gradually alter the demand mix for crude‑derived transport fuels over the next several years. The combination of chronic upstream constraints, wartime logistics bottlenecks and only theoretical OPEC+ quota hikes keeps the physical market tight into mid‑2026, even as recent convoy operations through the Strait of Hormuz have eased extreme price spikes. Parallel to this, the U.S. House approval of the Nationwide Consumer and Fuel Retailers Choice Act signals a structural boost for ethanol and biomass‑based diesel use, with potential medium‑term implications for U.S. gasoline and diesel demand growth, refinery runs and crude slate needs.

Prices & Market Tone

Brent and WTI are trading well above pre‑crisis levels, reflecting both war‑related supply losses and cautious OPEC+ output management. Recent data and analyst commentary point to Brent fluctuating broadly in a EUR‑equivalent band of roughly €90–€105 per barrel after retreating from peaks above €110, as partial restoration of Hormuz flows has reduced the most acute fears of imminent shortages. Volatility remains elevated, with options markets pricing in a wide range for Q2–Q3 as traders weigh geopolitical risk against potential demand erosion at high price levels.

Policy Shifts, Biofuels & Crude Demand

The U.S. House‑passed Nationwide Consumer and Fuel Retailers Choice Act marks one of the most consequential U.S. fuel policy shifts in years. It restructures the Small Refinery Exemption (SRE) framework under the Renewable Fuel Standard from 2028 onwards, granting eligible small refineries an automatic 75% exemption from Renewable Volume Obligations (RVOs) while tightening the definition of which refineries qualify. Crucially, it also prohibits the Environmental Protection Agency from redistributing waived blending requirements across the broader fuel pool. This limits the historic practice of shifting compliance burdens onto larger refineries and integrated majors.

At the same time, the bill authorizes year‑round E15 gasoline sales nationwide, potentially lifting ethanol’s share in the gasoline pool over time and providing more stable demand for corn‑based biofuels. Higher and more predictable blending volumes for ethanol, biomass‑based diesel and renewable diesel would increase the linkage between U.S. fuel demand and agricultural feedstocks such as corn and soybean oil, subtly changing how marginal barrels of road‑fuel demand translate into crude oil requirements.

Fundamentals: Supply, Demand & Biofuel Expansion

On the supply side, the global crude market remains constrained by the effective partial closure of the Strait of Hormuz since late February, with the IEA estimating a multi‑million‑barrel‑per‑day deficit and record inventory drawdowns through March–May. OPEC+ has agreed to a series of incremental output quota hikes, but much of this remains theoretical so long as key Gulf producers cannot fully export; real‑world flows stay well below pre‑crisis levels, and spare capacity is concentrated in a handful of core producers.

Demand growth projections have been trimmed modestly by both OPEC and the IEA, reflecting price‑induced demand destruction in some Asian markets and weaker macro signals, but both agencies still see net positive growth in 2026. Against this backdrop, the U.S. biofuel legislation points to rising renewable fuel volumes in the second half of the decade. Market projections embedded in the policy debate suggest U.S. biomass‑based diesel output could reach roughly 8.9–9.2 billion gallons in 2026–2027, with advanced biofuel production exceeding 10.8–11.3 billion gallons depending on final exemption levels. This expected expansion, supported by new renewable diesel capacity, will increasingly compete with fossil diesel at the margin, especially in the U.S. road‑freight segment.

Implications for Crude & Refining

• Higher ethanol use via year‑round E15 slightly reduces incremental crude‑based gasoline demand in the U.S. over time, though the effect before 2028 will be modest.
• Expanded biomass‑based diesel and renewable diesel output, fed by soybean oil and other fats and oils, could cap long‑run growth in conventional middle distillate demand, particularly if carbon‑intensity regulations tighten further.
• The restructured SRE framework reduces regulatory uncertainty for small refineries but narrows the scope of full exemptions; some high‑cost plants may still need to adjust operations or crude slates if compliance costs rise.
• For global crude exporters, U.S. demand growth for certain products may soften at the margin, but high prices and war‑driven disruptions keep near‑term call on seaborne crude robust.

Weather & Feedstock Links (Biofuel Angle)

Because the new U.S. policy sharply increases the importance of agricultural feedstocks for the fuel balance, weather conditions in key crop regions take on greater relevance for oil and product markets over the medium term. Early‑season forecasts for the U.S. Corn Belt and soybean areas point to largely normal to slightly warmer‑than‑average conditions into early June, with adequate moisture in most major producing states, which currently supports expectations for solid 2026 harvests.

While this has limited immediate impact on crude, any future weather‑driven spikes in corn or soybean prices could raise biofuel production costs, potentially narrowing the price advantage versus petroleum‑based fuels and shifting some marginal demand back toward conventional gasoline and diesel. For now, however, policy support and capacity additions dominate the biofuel growth outlook.

Trading & Hedging Outlook

For physical buyers (refiners, airlines, transport)

• Maintain above‑normal coverage for Q3–Q4 2026 via a mix of fixed‑price and options, as the supply deficit and unresolved Hormuz risks argue for a still‑elevated price floor despite recent easing from crisis highs.
• Consider incremental exposure to U.S. biofuel credits or physical biofuel offtake where feasible, anticipating stronger policy‑driven demand and tighter feedstock balances later in the decade.

For producers & exporters

• Use the current high‑price environment to lock in forward sales, but retain upside participation (e.g., via collars) given ongoing war risk and uncertain pace of Hormuz normalization.
• Monitor U.S. Senate deliberations on the biofuel bill: passage would reinforce long‑term competition from renewables in gasoline and diesel, subtly affecting long‑dated crude demand expectations.

For speculative traders

• Short‑term bias remains modestly bullish as inventories draw and physical balances stay tight, yet headline risk around ceasefire talks and convoy progress argues for disciplined position sizing.
• Relative value opportunities may emerge between crude and biofuel‑linked assets, especially if the market underprices the structural demand effect of U.S. E15 expansion and rising biomass‑based diesel output.

3‑Day Directional Outlook (Key Benchmarks)

• Brent (front‑month, EUR): Slight upward bias within a broad €95–€105 range as traders balance ongoing supply deficits with incremental relief from convoy‑enabled exports through Hormuz.
• WTI (front‑month, EUR): Expected to trade in a relatively tight band just below Brent, with U.S. inventory and macro data the main short‑term catalysts.
• Refined products: Gasoline and diesel cracks remain firm but vulnerable to demand destruction signals at current price levels, while the biofuel policy news provides a supportive backdrop for RINs and renewable diesel margins.