EPA Flexibility Hits Soybean Oil, Diesel Tightness Remains

The most important move today is not the roughly 1% rise in outright soybean oil. It is the collapse in the September/January soyoil spread. September soybean oil is around 68.15 cents/lb against January near 68.64 cents/lb, putting Sep/Jan at -0.49 cents/lb. Earlier this year the spread traded above +3 cents/lb. That represents a reversal of more than 3.5 cents/lb, equivalent to roughly $77/mt. The front of the soybean oil curve has gone from paying a substantial scarcity premium to carrying inventory into January. Yet this does not look like collapsing soybean demand. U.S. new-crop soybean export sales for the week ended August 20 reached 2.478 million tonnes, including another 1 million tonnes plus to China, while new-crop soybean oil export sales were zero. The weakness is concentrated in soybean oil and its domestic biofuel demand signal.

The regulatory signal now gives us a credible reason. December D4 RINs are around $1.87 after trading near $2.34 only a week ago, a decline of roughly 20%. The important development is broader than tomorrow's expected SRE decision. EPA has already shown its willingness to extend 2025 compliance. A roughly 1.6 billion gallon deficit looks formidable when obligated parties face a hard deadline. Extend the compliance clock and the same deficit loses prompt urgency. Refiners gain time to blend, source RINs and manage positions rather than bid aggressively against a fixed date. The mandate still exists, but its immediate economic force weakens. This is what the collapse in D4 RINs and Sep/Jan soybean oil appears to be pricing. Large RVO numbers have less impact on prompt feedstock prices when the market starts treating compliance dates as flexible.

Nothing in the diesel data changes my view. U.S. distillate inventories are around 103 million barrels, roughly 17 million barrels below the current five-year seasonal area near 120 million. ICE gasoil remains around $1,240/mt, with Sep/Dec backwardation close to $135/mt and Sep/Jan near $170/mt. The heat crack remains close to $96/bbl. Brent is around $89.60/bbl and WTI near $83/bbl, while both crude curves remain backwardated. U.S. crude production itself is close to 14 million bpd, so weak crude supply growth does not account for the product tightness. The shortage remains concentrated downstream in products and inventories. A soybean oil curve moving into carry while gasoil remains deeply backwardated argues against a broad collapse in diesel demand.

Europe gives no evidence of renewable fuel demand disappearing either. September RME indications remain around $1,615-$1,635/mt, UCOME around $1,705-$1,725/mt and HVO Class II around $2,875-$2,895/mt. The paper window traded 51kt of HVO Class II today, including 21kt in Q4 and another 18kt in the Oct/Q4 spread. German biodiesel exports reached 1.398 million tonnes in the first half, up 3.4% year on year, while imports increased 3.5% to 851,000 tonnes. HVO imports were at least another 325,000 tonnes. Asia tells a different feedstock story. Malaysian August 1-25 palm exports were down 11.4% month on month while production estimates were higher, and Q4 CPO is around $1,243/mt. Palm fundamentals remain softer than U.S. soybean oil fundamentals. We therefore have regional divergence rather than a synchronized collapse in renewable fuel demand - although it is my belief that Asia and Mideast may have already entered a recession as reflected in reduced primary commodity demand. Europe maybe entering a recession in Q4.

The physical data still support a further spike in Diesel, and I continue to see $1,500-$1,550/mt ICE gasoil as a realistic upside test if inventories keep drawing or geopolitical flows tighten again. What has changed is the U.S. biofuel policy transmission mechanism. EPA has introduced flexibility into the timing of compliance, and the market is using that flexibility to remove scarcity premium from D4 RINs and prompt soybean oil. Tomorrow's SRE decision matters, but the precedent already matters more. I will watch Sep/Jan soybean oil and D4 RINs together. If both continue lower while gasoil backwardation remains above $100/mt, the market is pricing regulatory flexibility rather than weaker diesel. Against that setup, I still prefer owning December soybean oil upside protection. The 73.5 cent call remains around $1,000 per contract with roughly 85 days remaining, inexpensive insurance against a policy or supply reversal while the diesel side of the equation remains tight.