The Diplomatic Illusion: A Strong Dollar, Depleting Inventories, and the Case to Stay Long Diesel

The global energy complex is opening today's session attempting to price in a diplomatic discount, with the market betting that Middle East risks are lessening following reports that Qatar is drafting a phased plan to reopen the Strait of Hormuz. This diplomacy illusion has taken some premium off crude, with December Brent trading down near $113.98 to $115.07 per barrel and WTI hovering between $99.94 and $101.06 per barrel. However, the physical reality is that both Saudi export exits are now under fire; the Houthis claim to have hit the Ras Tanura refinery on the Gulf side, adding to previous strikes on Yanbu on the Red Sea. Furthermore, Iran's Strait authority threatens legal action against all Sinokor ships starting November 1, ensuring the risk premium is here to stay. The prompt diesel squeeze remains fiercely intact: November-December heating oil is backwardated by 15.42 to 16.5 cents, and the November crack sits strong around $103 per barrel going into Friday's expiry.

ICE Gasoil

In Northwest Europe, the physical advanced biofuel and traditional biodiesel markets are holding significant premiums despite extreme paper volatility. Sustainable Aviation Fuel (SAF) flat pricing remains heavily elevated at $3,196.35 per metric ton despite the largely complied mandate for 2026, while HVO Class II is commanding $2,875.84 per metric ton. In the traditional biodiesel spot window, winter-grade RME continues to dominate, trading at a flat price of $1,839.02 per metric ton, which represents a massive +$409.25 premium over the underlying gasoil price of $1,429.77 per metric ton. UCOME printed at $1,629.77 per metric ton (a +$200.00 premium), and summer-grade FAME 0 lagged at $1,521.27 per metric ton (a +$91.50 premium). European blenders are navigating this fragmented physical pricing while the broader fossil paper market fluctuates wildly, highlighted by the November/April ICE Gasoil spread (GASX26 - GASJ27) plunging 11 percent today to 214.75.

In the United States, trading desks are grappling with a completely captive agricultural market and unprecedented refining strain. U.S. soybean oil is trapped on an "RFS Island"; despite weekly soybean inspections hitting a two-year high of 91 million bushels, soyoil export sales were a dismal 916 tonnes, meaning the strong domestic crush is pushing all oil directly into the compliance mandate. Consequently, December CME soybean oil (ZLZ26) is trading defensively at 66.71 cents per pound, keeping the December BOGO spread pinned near $87.44 per metric ton. Meanwhile, the U.S. refining network is flashing severe vulnerability. Phillips 66 is currently facing a dual-front crisis: an ongoing lockout of 400 Teamsters at its 275,000 barrel-per-day Bayway refinery, and a newly authorized emergency SPR exchange from the DOE for up to 400,000 barrels from West Hackberry to its Lake Charles refinery following an undisclosed crude delivery disruption. On the compliance side, D4 RIN paper is anything but frozen. December 2026 D4 futures on ICE traded 863 lots today and rose 2.4% to 1.925, up from 1.88 on Monday and well off the 1.7665 low of Oct 21. CFTC data puts open interest at a record 19,765 lots as of Oct 20. Covering the 8.686 billion annual target requires averaging 1.05 billion RINs per month through December, and the D4-D6 spread has widened to 12 cents.

Soyoil

Asian feedstock markets are entirely dictated by shifting currency flows and deeply negative substitution spreads that give palm oil a massive structural advantage. The POGO spread remains severely inverted, with the prompt POGV26 contract sitting at minus $302.42 per metric ton. This extreme pricing dynamic keeps Malaysian crude palm oil highly competitive for international discretionary blending, with November CPO futures (CPOX26) trading near $1,183.25 per metric ton. In contrast, U.S. and European feedstocks remain isolated by their respective domestic mandates and strong currencies. The surging U.S. Dollar Index (DXY), which reached 102.155 today, combined with safe-haven gold pushing up to $4,069.50 per ounce, continues to inflate dollar-denominated export costs and squeeze arbitrage margins for Western buyers looking to source Asian waste oils.

My prognostic today is that the market is heavily betting on a Middle East de-escalation narrative, but I believe that is a dangerous illusion. Traders should stay long diesel because absolutely nothing fundamental has changed; we are continuing to systematically deplete physical inventories. Farm diesel stress is building with AAA retail diesel rising to $6.3521 per gallon and GasBuddy reporting $6.19 per gallon, while the strained Phillips 66 situation—requiring an emergency SPR loan just to keep Lake Charles running while Bayway operates without union emergency responders—is a perfect example of how vulnerable the supply chain really is. The stronger dollar, in my view, indicates that it is the U.S. that will ultimately restart the war in the Middle East as global funds flow heavily into the USD. We are seeing the exact same capital flight from Brazil following their election volatility. America is actively playing its historical role as an economic and political turmoil refuge. With heating oil cracks stubbornly holding above $100 per barrel and physical supply maxed out, the underlying squeeze remains completely intact.

Correction (Oct 27): An earlier version said the D4 RIN market was frozen with no recent ICE trades. Dec26 D4 futures traded actively today. Thanks to a reader for flagging it.