Sanctions Supercharge Heat Cracks supporting Biodiesel — China Poised to Unleash Diesel Export Tsunami

Global diesel markets exploded higher to start the week, with ICE gasoil rallying nearly 5% as cash differentials hit three-year highs amid firm trading sentiment and a tightening European supply backdrop. Heating oil cracks have now surged to almost $50/bbl, while WTI sits at just $57.82/bbl, a spread that effectively values distillate yields at the equivalent of $100/bbl crude. The cause is clear — the latest U.S. and EU sanctions on Russian diesel exports have choked off a critical stream of middle distillates into Europe, triggering a violent, supply-driven rally rather than any true demand revival.

The situation is creating extraordinary refining margins for all non-Russian refiners, particularly in China and the Middle East, which are now in a position to capture the arbitrage. China, sitting on massive crude inventories and already easing product export quotas, is unlikely to ignore this windfall. The result is almost inevitable: a diesel export tsunami from China and the Gulf starting late December into early 2026. These regions can rapidly redirect barrels toward Europe and Africa, where margins are currently irresistible. The RBOB curve’s contango through April underscores that the rally is not demand-led — gasoline remains oversupplied even as diesel margins soar.

In the biodiesel complex, the strength in fossil diesel cracks is cascading directly into improved renewable fuel margins. RME traded at +$715–716 over ICE gasoil, while FAME 0 traded at +$600, keeping gross RME margins near $148/mt. HVO Class II was assessed at $2,506/mt, while SAF reached $2,905/mt, widening the SAF/HVO spread to $399/mt — one of the largest this year — as jet fuel prices gain seasonal momentum.

In the United States, the same dynamic is feeding through the renewable sector. Biodiesel crush margins improved to –21.53 for December 2025, up 10.7% on the day and +68.5% over three months, while the HO-BO spread tightened to –0.22. D4 RINs held at $1.016/gal for Dec ’25 and $1.083/gal for Dec ’26, maintaining the mild recovery seen over the past week. With LCFS credits steady in the mid-$50s/mt, overall biodiesel and renewable diesel margins are now at their strongest since early Q3. The message remains clear: what’s good for diesel is good for biodiesel.

Across Europe, policy momentum continues to lag the market. The German cabinet’s RED III transposition debate was again postponed, while Argus prepares to launch an Advanced FAME 0 barge contract on November 17 to meet tightening compliance demand. In the UK, the latest RTFO/SAF feedstock update reconfirmed that crop-based SAF remains ineligible, further shifting emphasis toward waste- and residue-based pathways.

In Asia, the EU Deforestation Regulation (EUDR) is still driving compliance efforts. Indonesia reported 12.25 million KL (≈10.7 million MT) of biodiesel consumption as of November 10, keeping it on track to exceed its 15.6 million KL (≈13.6 million MT) annual target. The government’s push toward B50 in 2026 and its recent seizure of 87 containers (1,802 t) of misdeclared CPO derivatives at Tanjung Priok show Jakarta’s determination to clean up supply chains ahead of EUDR enforcement on January 1, 2026.

Meanwhile, China’s COFCO signed 20 million tons of soybean and palm oil purchase agreements with Brazil during the Shanghai import expo, reaffirming its South American supply base as trade friction with Washington lingers. Only 8–14 cargoes (~770,000 t) of U.S. beans have moved so far against Beijing’s 12 million-ton pledge, while Canada’s agriculture minister expressed optimism after his Beijing meetings that canola exports could soon resume after opening their market to Chinese EVs. This could disrupt some shipments to Europe, but such will easily be compensated by Australia, which has record crop prospects!

Expect European gasoil backwardation to peak before year-end as Asian barrels begin arriving and the China diesel export wave floods global supply channels.