Diesel Panic Builds as Backwardation Explodes and Europe Quietly Bends Russian Sanctions

Energy markets moved further into stress on Tuesday as diesel shortages intensified and the forward structure across distillates tightened aggressively.

ICE gasoil backwardation surged again with the Mar26 Jul26 spread moving to roughly +211.75. The structure has moved vertically during the past two months and the spread chart shows a steep spike through February into early March, confirming a market scrambling for prompt barrels.

The strength in diesel immediately translated into biofuel markets.

RME traded in the window at +470 over gasoil, implying a flat price near 1416 dollars per tonne. FAME0 traded several times between +367 and +385 over gasoil with the window average settling near +373 and a flat price around 1318 dollars per tonne. UCOME printed once at +450 over gasoil with a flat price near 1395 dollars per tonne.

HVO demand also remained strong. Several HVO Class II trades printed between 1290 and 1310 dollars per tonne. On a flat price basis this implies roughly 2693 dollars per tonne with the HVO spread rising about 9 dollars on the day.

Refiners continued to step in on the bid side, consistent with strong compliance economics in the United States. D4 RIN prices remain near 1.56 which continues to support renewable diesel blending demand. Eyes in Washington are not focused on RFS.

The tightening across biofuels reflects the broader middle distillate market.

Asian gasoil cracks have reached more than 48 dollars per barrel, the highest level in more than three years, while middle distillate inventories in Singapore have fallen to around 2.69 million barrels, close to a two month low. Jet fuel markets are even tighter with regrade values touching record levels near 70 dollars per barrel.

Vegetable oil markets remain volatile under the same energy pressure. Palm swaps saw more than 200 thousand tonnes trade in a single session with activity concentrated in Q3 and Q4 strips around 1060 dollars per tonne. Malaysian palm output fell roughly 16 percent in February to about 1.33 million tonnes while stocks dropped to roughly 2.65 million tonnes. This is a bit early in the seasonal pattern.

Soybean oil also moved sharply relative to diesel. The BOGO spread rebounded violently with the May position rising to roughly +544, reflecting the strength in vegetable oil pricing relative to gasoil as the energy complex tightens.

Against this backdrop European energy policy has started to shift quietly.

Germany has secured an indefinite exemption allowing Rosneft’s German subsidiary to continue operating refineries despite sanctions. The decision allows Russian linked refining assets in Germany to remain active while the broader sanctions framework technically remains in place.

The timing reflects Europe’s tightening energy balance. German gas storage was reported near 21 percent in late February while EU storage overall sat near 30 percent. Those levels sit below the cushion normally required ahead of another supply shock.

Germany also continues to rely heavily on cross border biofuel flows. Biodiesel exports declined about 11 percent to roughly 2.9 million tonnes in 2025 while imports rose to about 1.7 million tonnes. Poland has emerged as a notable supplier with shipments into Germany increasing about 25 percent. The shift reflects a widening cost gap across Europe as production costs in Eastern Europe remain lower due to cheaper feedstocks, labor and operating expenses.

What makes the current situation difficult to assess is the scale of the disruption now unfolding in the Middle East.

Rough calculations suggest that roughly 10 million barrels per day of crude supply may currently be affected or offline. Iraq accounts for roughly 3 million barrels per day, Iran about 1.6 million, Kuwait about 1.5 million, the UAE roughly 1 million and Saudi Arabia roughly 3 million assuming only partial pipeline diversion capacity.

That represents close to 10 percent of global oil production.

At the same time LNG markets are under stress as shipments from the Gulf face similar logistical disruptions. If both crude and LNG flows remain constrained the consequences for global energy markets could become severe.

For now the effect is already visible across distillates.

War risk disrupts crude and product flows. Diesel spreads explode. Refiners pull renewable barrels into the system and physical biofuel premiums move higher.

The structure across distillates send a clear signal.

The market wants barrels today.