From Risk Premium to Reality: How Hormuz Impacts Biofuels Markets

If the Strait of Hormuz were to fully reopen, the most immediate impact would be a smoother flow of global crude oil supply. As geopolitical risk premiums fade, oil prices would likely face downward pressure. In this context, the biofuels industry would experience short-term headwinds.

From an economic perspective, biodiesel (HVO, FAME) and sustainable aviation fuel (SAF) are essentially substitutes for fossil fuels. When the prices of conventional diesel and jet fuel decline, the cost competitiveness of biofuels weakens. This effect is particularly evident in markets without mandatory blending policies, such as Southeast Asia and China, where demand could soften temporarily. Airlines and shipping companies, driven by cost considerations, may also slow their procurement of SAF and bio-bunker fuels.

Upstream, feedstock markets would also feel the impact. Used cooking oil (UCO), a key raw material, typically moves in tandem with fuel prices. A decline in oil prices would likely push UCO prices lower, further compressing margins across the industry—especially for export-oriented producers.

However, the medium- to long-term outlook remains intact. The primary driver of biofuels demand is policy, not oil prices. Regulations such as the EU’s RED III and the U.S. Inflation Reduction Act (IRA) provide structural support that is unlikely to change due to short-term price fluctuations. Moreover, lower oil prices could stimulate broader recovery in aviation and shipping activity, indirectly supporting long-term demand for SAF and other biofuels.

Overall, a fully reopened Strait of Hormuz would act as a short-term “cooling factor” for the biofuels sector rather than a reversal of its long-term trajectory. The key takeaway: short-term pressure, but unchanged long-term fundamentals.