Discarded frying oil becomes kerosene: how 1 million tons of used fat are at the heart of an aviation fuel market that could attract more than US$1 trillion in investment, already fueling planes with up to 80% fewer emissions, and have triggered a global dispute

Global SAF production reached ~1.0 million tonnes in 2024 (~0.3% of 300–350m t annual kerosene demand) and is projected at ~2.1m t for 2025 (still <1%), while EU mandates require 2% SAF by 2025, 6% by 2030 and 70% by 2050. Used cooking oil—81% of EU SAF feedstock in 2024—is supply-constrained: the US collected ~3.3bn lbs vs domestic biofuel consumption of 5.7bn lbs in 2024, China exported ~3.0m t in 2024 (≈43% to the US, ≈$1.2bn), and prices rose from ~$0.20/lb in 2020 to >$0.50/lb in 2024 (+~150%), triggering fraud risks and trade tensions (US threatened to suspend imports from China in Oct 2025). Impact: persistent feedstock scarcity, price volatility and policy actions are sector-moving—creating near-term headwinds for airlines and buyers but strategic opportunities for refineries (e.g., Neste ~1.5m t capacity with ~2.2m t planned expansions) and accelerating investment in alternative SAF technologies (Fischer–Tropsch, alcohol-to-jet, Power-to-Liquid).

Analysis

The immediate winners will be firms that control collection and preprocessing of low-cost lipid streams — ownership of the upstream logistics is now a scarce, transactable moat that can be monetized via long-term offtake contracts or spot arbitrage. Integrated refiners that can convert hydroprocessing units benefit from optionality, but their margins will bifurcate: those with secured feedstock or credit capture will widen EBITDA, while those buying spot feedstock will see margin erosion.

Policy and trade interventions are the highest-probability near-term catalysts and also the biggest tail risks: tariff announcements or anti-dumping investigations can re-route flows within weeks and reprice regional spreads; exposure should be measured in days-to-weeks. Over 6–36 months, capex cycles to convert existing units and build dedicated SAF capacity will determine who actually captures incremental demand — early movers pay capex but secure higher long-term margins.

A realistic upside path is driven by contract re-pricing and credit arbitrage rather than spot feedstock; companies that sell bundled fuel+credits to airlines will extract most value. The structural bear case is technological substitution — scalable e-fuels or FT routes — which would cap commodity-derived feedstock pricing but not eliminate short-to-medium-term scarcity rents.

Contrarian view: the market prices a permanent feedstock shortage, but supply elasticity exists via expanded collection networks, substitution to non-food fats, and modest policy recalibration once fraud/traceability issues surface. That implies a mean-reversion trade where players with rapid, low-cost buildouts (logistics + modular hydrotreaters) re-rate faster than legacy incumbents burdened by large greenfield projects.

Key Decisions for Investors

• Long PSX (12–18 months): buy a call spread or 12–18 month OTM calls sized to 3–5% of book — thesis: US refiner with logistics optionality will capture contract premiums as mandates firm. Target 20–40% upside if contracts reprice; stop-loss at 12% drawdown or if regional crack spreads compress by >150 bp.
• Long DAR (6–12 months): buy equity or LEAPs — thesis: vertically integrated collector/processor captures scarcity rents and can tighten supply to partners. Expect asymmetric upside (30–50%) if collection rates increase; downside limited by processing flexibility — set stop at 15% loss or margin contraction >200 bp.
• Relative pair — long PSX / short SHEL (6–12 months), equal dollar exposure: play regional policy and execution divergence. Anticipated 10–25% relative outperformance for PSX if US rollouts outpace European capex; unwind if global SAF spot premium collapses or if SHEL announces accelerated feedstock-secure contracts.
• Option volatility play on SAF credits (3–9 months): buy call calendar spreads on SAF/low-carbon credit ETFs or use dealer OTC structures to long convexity around key policy dates. Rationale: regulatory announcements create sharp implied vol spikes; target 2–4x payoffs on realized policy moves, cap exposure to <2% of portfolio.