The demand for HVO is expected to rise significantly in the years ahead on a combination of regulatory changes, the conversion of some fossil fuel-based refineries to lower carbon fuel alternatives as well as efforts to decarbonize the transportation sector. 

So far, the U.S. and Europe have been the major beneficiaries of these initiatives, due in part to favorable regulatory changes. These changes include the EU’s Renewable Energy Directive (RED III). Passed into law in 2023, RED III should be implemented in most EU member states from January 2025. Additionally,the U.S. Renewable Fuel Standard (RFS) plays a significant role, with both regulations promoting biodiesel and renewable diesel through the provision of tax credits and Renewable Identification Numbers (RINs) or European environmental ticket prices for the major blenders of these products. Further blending requirements in other sectors such as aviation are coming in 2025 under Refuel EU, with refiners encouraged to produce sustainable aviation fuels (SAF) to meet the longer-term ambitions to decarbonize airline emissions.² These changes could further strain the global feedstock supply, with products like used cooking oil becoming highly prized. 

A recent report by the European Commission showed that from the 6.7 million flights leaving European airports in 2023, a total of 164.85 million tons (Mt) of carbon emissions was created: the equivalent of 80 million petrol cars on the road. The 2023 volumes mark an annual increase of 11.2% in the number of flights, but a 13.2% growth in terms of carbon emissions. Bloomberg New Energy Finance also states that aviation was the only sector to increase its carbon emissions, whereas emissions from sectors such as cement, ceramics and power fell year on year. Tackling the issue of the fuels alongside the impact from the emissions are measures that are aimed at bringing down overall emissions from the sector. 

Used cooking oil (UCO), which is a waste cooking oil referring to oils and fats that have been used for cooking or frying in the food processing industry, restaurants or households, is a key component to both hydrotreated vegetable oils and sustainable aviation fuel and this has placed constraints on the supply chain and resulted in greater price volatility entering the market. UCO can originate from both vegetable oil and animal fats.

So, what is behind the growth of certain non-crop feedstocks? 

Pivotal to the European Union’s low carbon energy strategy is the Renewable Energy Directive or RED III, which forms part of the “Fit for 55” package, which has set a target to reduce overall carbon emissions by 55% by 2030.³ Within the RED III Directive, there are additional targets to boost the share of renewables in road transportation to at least 29% by 2030, or implement a binding target to reduce greenhouse gas intensity in transport by 14.5% by 2030. This is a sharp increase from the prior iteration of RED II, which stated a renewable energy target of 14% for the transportation sector by 2030. Importantly, there is also a binding secondary target of 5.5% for advanced biofuels that are derived from non-food feedstocks, which would include used cooking oil. Looking at the hydrotreated fuels, the most liquid market is what is referred to as a Class II, where used cooking oil is used as a feedstock.

These regulatory changes have seen a greater emphasis placed on products like used cooking oil and they have begun to trade in greater volume as companies are increasingly mandated to blend alternative non-food feedstocks to meet stricter supply contracts. Since their launch in October 2024, European UCO futures contracts from CME Group have traded around 9,000 tons, with volumes expected to rise as the market expands. This growth is driven by UCO’s role as a vital feedstock for various global bio-markets, including hydrotreated biofuels and sustainable aviation fuel. 

UCO fob ARA (Argus) futures contract (Globex code: UCD) can be used by renewable diesel producers to hedge the price of their feedstock and by UCO producers to lock in a sales price for their product. The contract financially settles to the waste feedstock price assessed and published by Argus Media.⁴

CME Group will further expand its coverage of the waste oils sector through the introduction of key feedstock contracts on the U.S. Gulf Coast for UCO. These new contracts also reference the Argus price assessments.

A European HVO producer is concerned about the impact from rising feedstock costs on their processing margins for HVO. The producer buys UCO as the key feedstock to also benefit from some of the greenhouse gas savings associated with the UCO. The producer has agreed to a fixed price with a distribution firm for the HVO and has settled on a price of $2,000 per metric ton. The producer is now concerned about the price they pay for the UCO as they need to generate a margin of $900 per metric ton to cover other downstream and storage costs associated with the HVO. Therefore, the HVO producer needs to be able to hedge the margin with the purchase price for the UCO at $1,100/mt or less. 

Rather than waiting to purchase UCO at a fixed price and take on the price risk inherent in such a trade, the producer could purchase UCO for future delivery based on the Argus UCO fob ARA price assessment thereby hedging their exposure to adverse price movements in the UCO price. 

For example, in January, a European HVO producer plans to buy 50,000 metric tons of used cooking oil from a collector for June delivery. Assume that June UCO futures are trading at $1,000 per metric ton. The producer is aiming to establish a margin of $1,100 per metric ton or higher to cover all associated costs. 

In both scenarios the producer may also decide to hedge the production of the HVO but with the UCO, they are also able to hedge their input costs.⁵

In both hedging examples, the producer has been able to hedge their feedstock input costs at or below the $1,000 required level to ensure a margin of around $900 per metric ton to cover their downstream and storage costs.

CME Group data shows that total volumes in Soybean Oil (ZL) futures and options have continued to rise year-on-year since 2016. Average daily volume (ADV) in CBOT Soybean Oil futures and options has risen from around 120,000 lots per day in 2016 to over 160,000 lots per day in late 2024. Trading in Soybean Oil options has nearly doubled when measured on an average daily volume basis from 2016 to 2024. 

The futures and options contracts are the most liquid in the global vegetable oil markets, and commercials and the broader financial and investment firms use these markets to manage risk in what is widely seen as an increasingly volatile sector. Part of the reason for the rising volumes is that companies are using soybean oil as an alternative hedging product for other markets, most notably in the bioenergy markets.

According to the U.S. Department of Agriculture (USDA), the amount of soybean oil being used in the U.S. to support the growth in biofuels production continues to rise. The rise of renewable diesel production, which is a hydrotreated vegetable oil, is at the center of production growth. In the latest data for 2023-2024, the volume of soybean oil being used for biofuels was close to 50%, up sharply from only a few years earlier.

The waste feedstock market looks set to grow sharply in the coming years as biofuel blending mandates continue to tighten and a groundswell of support for a cleaner environment. Used cooking oil is emerging as a key feedstock with its broader uses in sectors such as hydrotreated biofuels and sustainable aviation fuel.⁶ The higher greenhouse gas savings on offer with UCO are also a major attraction as the world scales up its ambitions to reach net-zero carbon emissions by 2050.

1. https://www.iea.org/reports/renewables-2023/transport-biofuels
2. https://transport.ec.europa.eu/transport-modes/air/environment/refueleu-aviation_en
3. https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=OJ:L_202302413
4. https://www.argusmedia.com/-/media/Files/methodology/argus-biofuels.ashx
5. The hedge for HVO is not covered by this example.
6. https://www.icao.int/environmental-protection/GFAAF/Pages/Conversion-processes.aspx