Europe Reaches To Mexico for Diesel

Europe is beginning to show the diesel stress I have been expecting. Roughly 300,000 barrels of Mexican ULSD have reportedly been identified in recent European purchases. I would not assume this represents a single cargo. At roughly 40,000 metric tons, the volume itself does not alter the European diesel balance, but the origin matters. Europe is reaching as far as Mexico for diesel while Russian availability remains restricted and normal Middle Eastern product flows remain impaired. At the same time, despite all the noise US heating-oil crack remains close to $96/bbl despite another weaker session in crude. Crude is responding to the possibility of a Hormuz shipping arrangement between Iran and Oman. Distillate economics are barely responding. For me, Europe sourcing Mexican ULSD while the heat crack refuses to break is a stronger signal than the outright decline in crude.

The Gulf shipping picture is more nuanced than simply calling Hormuz blocked. LVision counted 69 crude tankers inside the Persian Gulf on August 23 with around 95 million barrels of carrying capacity, yet only 27.5 million barrels, or 29%, were laden. Roughly 67.3 million barrels of capacity sat in ballast. There is no obvious shortage of ships inside the Gulf. The problem appears to be efficiency and outward movement. Total crude tanker capacity inside the Gulf has fallen from roughly 180 million barrels in late June to around 95 million barrels this week, a decline near 47%, while the seven-day average of outbound crude has dropped to around 7.6 million b/d from more than 12 million b/d in late June after MOU was signed. Elevated ship-to-ship activity in the Gulf of Oman and a substantial Iranian and Iran-linked fleet sitting at anchor add friction to the system. The barrels have not disappeared. Moving them into the international market has become slower and less efficient. Diesel does not require a complete Hormuz closure to become scarce.

Northwest Europe is also giving us an interesting biofuel signal. September RME traded around $433/mt over gasoil, up $18/mt from the prior close. September FAME moved to $364/mt over, up $24, while September UCOME reached $529/mt over, up $39. October UCOME gained $50 to around $500/mt over. HVO class II itself was steadier, with September around $1,685/mt, only $5 lower, but the paper volume is again the number worth watching. Week 34 HVO2 paper has already reached 117.9 kt through Wednesday. That is roughly 80% of the entire 147.5 kt traded during week 33, with two trading sessions still remaining. Week 32 was exceptional at 357 kt, but the important point is that HVO2 activity did not disappear after the spike. Paper participation remains elevated. I read continued interest in HVO2 alongside stronger RME, FAME and UCOME differentials as evidence that the NWE market remains actively focused on renewable diesel exposure even while fossil prices weaken.

Vegetable oils are telling a different story - no supply issues! Palm was the weak link today, with front CPO falling roughly 1.4% to 1.5%. Malaysian palm exports during the first 25 days of August were estimated down between 11.4% and 20% month on month, while August 1 to 20 production was estimated up 1.08%. China also has comfortable nearby vegoil inventories. Combined commercial soybean oil, palm oil and rapeseed oil stocks rose 60,000 tons to 2.55 MMT, with soybean oil stocks at 1.26 MMT and palm at 870,000 tons. Yet soybean oil remains resilient. Brazilian October soybean oil basis softened again to around 13.2 cents/lb under Chicago, but Chicago oil has not followed palm or crude sharply lower. Q4 POGO jumped $60.95/mt to $160.24 because petroleum weakened much faster than palm, while Q4 BOPO fell $15.73 to $222.90. BOGO behaved similarly. September BOGO continues to bounce around the $250 to $260/mt area, but I still see this as gasoil falling faster than soybean oil rather than the start of a new soybean oil bull move.

The grain complex remains the reason I do not want to express the lower BOGO view without soybean oil upside protection. US corn good-to-excellent ratings fell three points to 57%, against a five-year average of 62%, while soybean ratings stand at 60% versus 69% last year. Pro Farmer's 173.2 bu/acre corn yield estimate sits 7.5 bushels below USDA's 180.7, representing roughly 656 million bushels, or 16.66 MMT, of production. China is also keeping crush rates high, with 2.22 MMT processed last week and imported soybean stocks rising to 8.47 MMT. Black Sea grain availability, US yield uncertainty and questions around 2026/27 South American acreage keep enough risk in the feedstock complex to support soybean oil. My main prognostic has not changed. I still expect BOGO to work lower. What has changed is that the diesel thesis is starting to leave fingerprints in the physical market and gearing up for the next leg-up higher. Europe reaching to Mexico for ULSD, a heat crack still near $96/bbl, reduced effective Gulf flows and another heavy week of HVO2 paper activity are increasingly consistent with the distillate tightness I have been expecting.