European HVO Class IV-II spread at an all-time high

The HVO Market Divide: Why Class IV is Outpacing Class II

The landscape of hydrotreated vegetable oil (HVO) is undergoing a significant shift. Recently, the northwest European HVO Class IV–II spread hit a record high of approximately $450/t, a sharp increase from $250/t just a month prior. This divergence highlights a growing gap between two critical biofuel grades.

To understand this trend, we have to look at the feedstocks. HVO Class II is derived from used cooking oil (UCO), while Class IV is produced from palm oil mill effluent (Pome). While both are essential for decarbonization, they are treated particularly differently under the EU Renewable Energy Directive (RED).

Regulatory Drivers: The Impact of RED III

The primary engine behind the current market volatility is regulatory compliance. Under the EU’s RED framework, Class II biofuels (made from Annex IX B feedstocks) are capped in how much they can contribute toward transport renewable energy targets. In contrast, Class IV (Annex IX A) is heavily incentivized.

A major catalyst for current demand is the expectation that Germany and the Netherlands will abolish the “double-counting” of Annex IX feedstocks. When double-counting is removed, a higher absolute volume of biofuel is required to meet greenhouse gas (GHG) reduction quotas. This naturally spikes demand for “drop-in” fuels like HVO.

While countries including France, Italy, Spain, Germany, and the Netherlands missed the May 21, 2025, implementation deadline for RED III, market participants generally expect these changes to proceed, potentially retroactively from January 1, 2026.

Market Structure and the “Decoupling” Effect

Beyond legislation, the way these fuels are traded is changing. Historically, traders hedged Class IV exposure using Class II contracts. But, the launch of a specific Class IV paper contract on the ICE exchange has changed the game.

This new financial instrument allows Class IV values to decouple from the Class II benchmark. We are already seeing this in the data: on a recent Tuesday, the Class IV premium to gasoil traded higher by $95/m³, whereas Class II only rose by $20/m³. This structural shift allows the spread to widen more clearly as Class IV becomes the preferred grade for those hitting capped UCO limits.

The Indonesian Factor: B50 and Supply Constraints

The future of Class IV HVO is not just decided in Europe, but also in Southeast Asia. Indonesia, a major exporter of refined Pome oil, is moving toward a B50 blending mandate (50% biodiesel, 50% fossil diesel) starting July 1.

This mandate requires fuel blenders to submit implementation plans, which could lead Indonesia to redirect more of its Pome supply toward domestic production rather than exporting to Europe and the Asia-Pacific region. This potential supply tightening further supports the bullish outlook for Class IV prices in the ARA hub.

Future Outlook: Pome vs. UCO

As UCO-based HVO reaches its regulatory cap, the industry is likely to lean more heavily on advanced grades. However, the path for Pome is not without hurdles. In Germany, while Pome is currently likely to be allowed for quota generation, a ban is anticipated by 2027.

This creates a tight window of opportunity for Class IV. The interplay between Indonesian export policies, EU RED III implementation, and the availability of Annex IX A feedstocks will determine if the record-breaking spreads we are seeing today become the new norm.