Diplomatic Mirage Drags Diesel Lower While Palm Oil Flush Sinks Global Vegoils
Diplomatic headlines and strategic reserve releases are driving the energy complex lower despite tight underlying physical fundamentals. Vice President Vance reportedly reached out directly to Iranian leadership regarding a temporary peace deal, triggering an overnight selloff that pulled WTI crude down to $102.06 and Brent to $114.71. This diplomatic pressure was amplified by France initiating a 10 million barrel release of diesel from its reserves, which helped push December heating oil down to $4.5345. While Brent expiry is often associated with gasoil and heating oil weakness, this easing rarely lasts, especially since the market is blatantly ignoring tight physicals. US commercial petroleum inventories just saw an aggressive 3 million barrel draw—including 1.7 million barrels of diesel—driving stocks to fresh five-year trailing seasonal lows, while satellite imagery confirmed a damaged 550 kb/d cracking unit at Ras Tanura. Interestingly, these easing wholesale diesel margins aren't providing immediate relief at the pump; retail diesel in Phoenix, Arizona printed a record $6.4663 this morning.
In Europe, inland river logistics remain severely constrained. The Rhine River at Kaub is projected to fall toward the mid-20s cm range by early November, which will restrict barge traffic and keep freight elevated. In the physical biofuels market, downstream spot pricing remains active with November FAME 0 bid at $1,515 and RME bid at $1,670, however, Northwest Europe paper trading activity remains very slow and sluggish. Meanwhile, the Northern Hemisphere harvest is effectively wrapping up. The large oilseed harvest in Ukraine, and even in Russia, will weigh heavily on regional and global markets heading into spring 2027. This comes as broader global crude supply quietly tightens; Russian crude production is materially disappointing, and OPEC+ crude exports, notably from Saudi Arabia, are falling this month after a brief September surge.
In the Americas, the US soybean harvest is pretty much complete, wrapping up rapidly across the Midwest. However, CME soybean oil is experiencing a severe flush, breaking through the 65-cent support level to hit an intraday low of 64.66 cents per pound. The demand issue faced by bean oil reflects the serious dependence that the crush industry has on the biodiesel and renewable diesel sectors, which now command a massive 49% oilshare contribution. We have created an RFS island that we think is robust, but in reality, the extreme dependence on biodiesel/RD makes it fragile for the industry as oil is only 20% of soybeans, and this structural vulnerability reverberates directly to farmers who have not recovered since continued tariff issues with China. This fragility is on full display today: reported outages at several major US renewable diesel plants are actively pulling feedstock prices lower by temporarily destroying demand, even as the industry braces for a looming Q4 D4 RIN compliance gap. Meanwhile, the supply chain remains choked by the Mississippi River at St. Louis, which is forecast to plunge back below 3 feet by Sunday, while Memphis logged its fifth consecutive day below the 0.0 ft low-water trigger. Despite bearishness dec/may soyoil spread recovered a bit.
Asian vegetable oil markets are facing intense downward pressure, and the aggressive flush in palm oil ahead of the lower winter demand season will continue to heavily depress all vegetable oils globally. Storage tanks across Southeast Asia are filling rapidly, and policymakers are scrambling to move inventories: Indonesia officially set its November crude palm oil reference price at $978.90 per metric ton, cutting its export tax to $124 per ton, while Malaysia's Plantation and Commodities Ministry is consulting industry players on a proposed CPO export duty exemption. The only bright spot in this deteriorating vegoil picture is the steep discount of palm oil versus gasoil, which actively incentivizes Southeast Asian countries to blend more PME (Palm Methyl Ester) or PSME (Palm Stearin Methyl Ester) into the fuel pool. Crucially, the POGO discount right now—trading near -$297.72 on the weekly chart and board spreads hovering at -$274.98 for November and -$200.51 for December—is comparable to what we saw in 2015/2016 when a large amount of PME/PSME went into the gasoil pool. Given this massive CPO discount to diesel, the fact that Indonesia has now abandoned the 50% blend in favor of anchoring their 40% blend is quite puzzling.
Looking ahead, the flush in global vegetable oils is expected to continue now that Chicago soyoil has broken below support and the forward curve show a carry until July of -0.98 and then shift to inversion or backwardation +1.39 to Dec 2027;although, that spread weakness is concerning. No one should underestimate the effect of this negative $200 POGO spread through the end of the year; it is a massive market incentive that blenders and traders can actively plan around. At the same time, with wholesale diesel prices falling faster than soyoil today, the BOHO spread has blown out to roughly +17¢, widening domestic biodiesel margins even as the market navigates renewable diesel outages and prepares for the EPA's virtual SRE hearing on November 4th. Compounding all of these pressures, severe inland freight constraints on the Mississippi and the Rhine are adding significant localized friction to already very high vessel transportation costs at sea for any imports or exports, ensuring total logistical costs remain punitive for the near term.
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