Diesel Roars, RINs Rebound, EPA Still Silent

The strongest signal on the screen today is diesel, not crude. September ICE gasoil surged to $1,275.50/mt while January closed near $1,075.75, putting Sep/Jan backwardation back at $199.75/mt. January gasoil now trades almost 16% below September. September heating oil is around $4.35/gal, up more than 7 cents, while WTI sits near $83/bbl and Brent remains below $90. The US heating-oil crack is back close to $100/bbl. This move is occurring despite a stronger dollar and a hawkish Jackson Hole message. Crude is pricing improving availability. Refined products are still pricing scarcity. My view remains unchanged, the distillate problem is not finished and a move toward $1,550/mt ICE gasoil remains in play if prompt supply fails to improve through September.

Heat Crack Margin

Hormuz crude flows are recovering from the July lows, but the latest vessel estimates still leave a substantial deficit. Weekly outbound crude transit is estimated near 6.8 mb/d, up from only 3.9 mb/d in late July, but still around 64% of the pre-war level. More crude reaching the market helps suppress outright crude prices, but it does not immediately replace lost refining capacity, constrained clean-product exports or longer product voyages. The market is making that distinction clearly. Sep/Jan gasoil has rebuilt to almost +$200/mt even as crude softens. US implied gasoline, distillate and jet demand also remains close to recent seasonal norms. There is still no convincing evidence of enough demand destruction to solve the product shortage through consumption alone.

Soybean oil is remarkably strong as well. September is up 3.81% to 70.59 cents/lb and December is up 3.72% to 71.06, yet the calendar structure still tells a different story. Sep/Dec remains around 0.47 cents in carry and Sep/Jan around 0.40 cents in carry. Front BOGO is near $281/mt and remains more than 50% below levels seen three months ago because gasoil has risen so aggressively. US biodiesel economics weakened sharply today, with the September RD crush falling about 10% to roughly $1.32/gal and December falling almost 17% to around $0.87/gal. The soybean-oil rally is therefore not being confirmed by prompt physical tightness in the curve. Policy expectations remain a major component of the move.

BOGO

EPA has still not released the anticipated 2025 small-refinery exemption decision as of the time of writing, yet the RIN market is already moving sharply. Dec-26 D4 RINs reached about $2.22, up more than 14% on the day, while Dec-27 D4s rose about 8.6% to $2.16. That is a strong reversal after D4 values fell toward $1.92 earlier this week following the compliance extension. Some positioning ahead of month-end might be involved, although Monday remains another August trading session, so I would not attribute today's move to month-end flows alone. Short covering ahead of an unresolved SRE decision and expectations of meaningful reallocation look equally important. Market discussion continues to center on exemptions potentially approaching 1.8 billion RINs versus roughly 991 million already incorporated into the existing framework. The incremental difference is around 809 million RINs. If roughly 70% were eventually reallocated, about 566 million RINs would move into future obligations. Much of the aggregate mandate therefore survives on paper, but timing matters. Demand moved into 2027 is not prompt demand. The strong D4 move today looks more like the market rebuilding regulatory risk premium before EPA finally shows its hand.

Europe remains firm across renewable fuels and fossil diesel. Today's window showed RME near +$470/mt over gasoil, FAME near +$475, UCOME around +$602.50 and HVO Class II near +$1,225 on its escalated basis. With gasoil around $1,243/mt during the window, that implied roughly $1,713/mt RME, $1,718 FAME and $1,846 UCOME before gasoil subsequently rallied another $30-plus. Asia is firm as well. Q4 palm oil gained about 1.9%, while soybean oil materially outperformed palm. China remains complicated. The rumored 1.5 million tonne soybean auction turned into an official announcement of only 68,000 tonnes, while the previous five auctions offered 2.15 million tonnes and reportedly sold 72%, roughly 1.55 million tonnes. At the same time, weather risks are building across Chinese corn and soybean regions and US exporters reported another 182,000 tonnes of soybeans sold to China.

My prognostic going into September is that geopolitical risk around Iran is becoming underpriced again. I cannot identify the catalyst, but I sense increasing urgency in Washington. The administration has moved rapidly from financial pressure to a broader secondary-sanctions campaign, is pushing for wider international participation and has rejected simply returning to the previous ceasefire terms. Iran, meanwhile, is linking normalization of Hormuz to ending the war. That does not look like a settled conflict. What gives me pause is the divergence between crude and products. Crude is starting to price normalization while diesel is moving in the opposite direction. My concern is that the next phase of the Iran war is larger than the market currently expects. With Sep/Jan gasoil already near $200/mt backwardation, the refined-product market has little room to absorb another disruption.

The market enters the weekend with crude softer, diesel sharply stronger, soybean oil sharply stronger, D4 RINs sharply higher and EPA still silent. The cleanest signals remain gasoil pricing immediate physical scarcity, soybean oil pricing future policy expectations without the same confirmation from its calendar curve, and D4 RINs rebuilding regulatory risk premium ahead of a decision that has still not arrived.

Blood Moon