Diesel Breaks the Glass Ceiling as SAF Meets the Cost Test

Thursday delivered another violent repricing of prompt energy. August Brent rose 6.3% to $100.03/bbl, WTI gained 5.3% to $91.47/bbl and August ICE gasoil jumped $103.75/mt to $1,282/mt. The diesel heat crack reached $90.78/bbl, while August/December gasoil backwardation widened to about $250/mt and August/March moved above $340/mt. These spreads point to immediate distillate scarcity rather than a uniform rally across the curve. Gold moved in the opposite direction, pushing the gold-to-Brent ratio down to 40.42 after testing support. As long as the heat crack holds near $90/bbl and prompt backwardation stays above $200/mt, shorting gasoil because the outright price looks high carries exceptional risk. Further disruption around Iran, the Strait of Hormuz or the Red Sea would put the March gasoil high near $1,554/mt back into view.

Heat Crack Margin

December D4 RINs recovered to around $2.40, while August BOGO dropped to roughly $384/mt. Soybean oil gained only about $17/mt during the latest move, while gasoil rose more than $100/mt, confirming diesel now controls the spread. RINs continue to price compliance scarcity, while BOGO reflects the relative cost of vegetable oil against fossil diesel. I expect BOGO to retest its early-April low near $40 to $60/mt. A return of gasoil toward $1,554/mt would bring BOGO close to $100/mt even with soybean oil holding near current levels. A modest correction in soybean oil, another diesel spike, or both would close the remaining gap. European biodiesel flat prices should continue following gasoil, but physical premiums risk further compression as the fossil leg outpaces feedstocks. Reported paper trading included 43kt of RME, 72kt of RME/FAME spreads, 15kt of FAME, 11kt of UCOME and 7kt of HVO II.

BOGO

Palm oil also rose, but gasoil rose much faster. Front-month POGO has collapsed from around plus $420/mt in January to minus $60/mt, a swing of roughly $480/mt. This move does not signal weak palm fundamentals. August CPO gained more than $20/mt during the session, supported by energy and Indian festive demand. Prompt palm now trades below gasoil, yet the discount remains insufficient to trigger broad discretionary PME blending in Southeast Asia. Allowing at least $100/mt to convert CPO into basic PME, finished biodiesel still sits around $40/mt above gasoil before freight, financing, storage and blending costs. The meaningful blending window has historically appeared closer to minus $150 to minus $200/mt. Another $100/mt rise in gasoil alongside a $20 to $30/mt increase in palm would move POGO toward minus $130 to minus $140/mt. Palm does not need to fall for PME to enter the diesel pool. Gasoil only needs to outperform it again.

Front Month POGO

SAF policy is separating jurisdictions willing to force or subsidize demand from those unwilling to absorb the premium. Japan is discussing cutting its 2030 target from 10% to 1%, followed by 3% in 2031 and 5% in 2032. Using a working SAF density of 0.70 kg/litre, the original target represented about 1.20 to 1.34 million mt of annual demand, while the proposed 1% requirement represents only 120,000 to 134,000 mt. Japan’s retreat appears tied to imported feedstocks, domestic production costs and a yen near 163 per dollar rather than a global lack of SAF capacity. Capacity in the EU, China and the US appears adequate, but nameplate capacity does not guarantee output when refiners shift between SAF, renewable diesel and HVO according to margin. Europe raises compulsory SAF use from 2% today to 6% in 2030 for fuel supplied on departures from EU airports, including foreign airlines. The Airbus and ICF study estimates Canada would need support of CAD 1.15/litre, equal to roughly CAD 1,643/mt, to reach a 40% SAF share by 2040. Maritime biofuels face the same economic test under FuelEU Maritime. The regulation sets a declining well-to-wake emissions threshold rather than a fixed blend, favoring certified UCOME, waste-based HVO and eligible animal-fat pathways while giving crop-based fuels little compliance value.

Friday should be driven by weekend positioning rather than fresh biofuel fundamentals. With Brent above $100/bbl, the heat crack near $90/bbl and August/December gasoil backwardation near $250/mt, traders will be reluctant to carry uncovered short diesel exposure into two days of possible escalation. This should keep prompt gasoil, cracks and time spreads supported into the close, with biodiesel and renewable diesel flat prices following while physical premiums struggle to match the fossil move. Another gasoil spike would push BOGO and POGO lower even if soybean oil and palm remain firm, moving both soybean-based biodiesel and PME closer to stronger blending economics. A credible de-escalation headline would hit crude and gasoil first and compress the extreme backwardation quickly. The practical position into the weekend is defined upside exposure, limited naked diesel shorts and restraint when paying biodiesel premiums already lagging the energy rally.