The War Premium Takes a Day Off

Energy started the week with a substantial correction, concentrated in middle distillates rather than crude. September ICE gasoil fell about 5.2% to $1,244/mt while Brent lost roughly 2.3%. September/December gasoil backwardation dropped about 15% to $124.50/mt and September/January fell about 14% to $160.25/mt. The heating-oil crack fell below $100/bbl for the first time in ten days, trading near $94/bbl. The market has clearly reduced the probability assigned to an immediate return to kinetic war and removed part of the geopolitical premium. Yet $94/bbl for the heating-oil crack and $124.50/mt Sep/Dec backwardation remain extreme measures of distillate scarcity. My prognostic has not changed. The distillate shortage is not over. I still expect renewed upside into early September, with ICE gasoil at risk of retesting the $1,500 to $1,550/mt area if physical supply fails to improve.

Heating Oil Crack Margin

The SPR reinforces that view. Headline U.S. Strategic Petroleum Reserve stocks have fallen below 290 million barrels, but Renegade's earlier work argued that the headline inventory materially overstated oil available at meaningful delivery rates. When the SPR stood near 308 million barrels, the analysis estimated roughly 150 million barrels of functional supply, with around 100 million barrels constrained by site, cavern and delivery limitations. Since then the reserve has fallen by roughly another 18 million barrels. If those withdrawals came primarily from the deliverable pool, functional inventory is now closer to 132 million barrels. Against refinery crude inputs around 17 million b/d, that represents less than eight days of refinery supply. In my view, the United States is approaching only one week of operationally useful SPR coverage. At the same time, Washington has shifted the immediate confrontation with Iran toward secondary sanctions. Treasury has given counterparties time to alter their behavior and has indicated that a major financial institution will be sanctioned by the end of this week. Friday is therefore the next event date. The market has several days to reduce exposure, which helps explain the reduction in war premium, but it does nothing to replenish diesel inventories or refinery output.

There is also a broader trade-war narrative developing around China, and I think traders should separate substance from distraction. Washington is reportedly preparing an additional 7.5% tariff on Chinese imports on top of the newer 12.5% tariff layer, while Treasury simultaneously increases pressure on institutions supporting Iranian trade. Chinese banks, teapot refiners, manufacturers, shipowners and exporters are therefore facing pressure from several directions. The maritime issue also returns in Q4. The operative USTR date is now November 10 rather than October 1, when the suspension of the Section 301 action covering Chinese-owned, Chinese-operated and Chinese-built vessels expires. That matters directly to biofuels because China exported roughly 1.24 million metric tons of UCO during May through July, close to double last year's volume, with Europe and North America major destinations. Changes in vessel economics risk redirecting those feedstock flows precisely when U.S. renewable-fuel demand is strong. Against this, the renewed political focus on Canada looks to me like deliberate narrative redirection. The latest detailed bilateral data showed a U.S. non-energy merchandise surplus with Canada, meaning energy explains the overall deficit. I would treat the Canada headlines as noise and keep attention on Chinese tariffs, secondary sanctions, vessel economics and refined-product flows.

Soybean oil increasingly looks like two separate markets. The first is the U.S. RFS island, where RINs, RVO obligations, 45Z economics and domestic feedstock eligibility increasingly determine the marginal price. D4 RINs fell sharply as EPA prepares to extend the compliance deadline and address pending Small Refinery Exemptions, yet the physical numbers continue moving the other way. U.S. biodiesel and HVO production reached 8.87 million metric tons during January through July, up 1.29 million tons, or 17%, from 7.58 million tons last year. Biodiesel production rose to 2.77 million tons and HVO to 6.11 million tons, while soybean-oil inventories fell to about 0.88 million tons, down roughly 25% in four months. Soybean oil sold off with energy Monday, yet gasoil fell faster and nearby BOGO bounced toward +$238/mt. The second market is global, where Brazilian and Argentine soybean oil competes directly with palm, sunflower and rapeseed oil. Brazilian FOB basis remains deeply discounted to Chicago, but Brazil itself is consuming more soybean oil. Biodiesel production reached a record 806,000 metric tons in July, up 7% year over year following the move to B15, while Brazil still exported an unusually large 318,000 tons of soybean oil during the month. Maintaining both elevated domestic biodiesel consumption and large exports becomes harder as Brazilian crush declines seasonally later in the year. Brazil remains one of the main pressure valves between the global soybean-oil market and the U.S. RFS island. If Brazilian exports contract into Q4, the global market starts tightening toward U.S. values yet soybean oil sitting on the 50 day wdma. A rise of Soybean oil will be indicative of the next leg up for Gasoil.

Soybean Oil

Europe provides the strongest evidence against declaring the distillate shortage finished. Biofuel paper remained active despite the gasoil correction, with 28.5 kt of RME, 15 kt of FAME, 31.9 kt of UCOME and 56.4 kt of HVO Class II trading. September UCOME reached about $465/mt over gasoil, up $65, while Q4 HVO Class II held near a $1,752/mt differential. The Rhine has improved sharply from its record lows, but Kaub remains around 60 cm, tank-barge capacity is still only around 20% to 25% and ARA-Basel freight remains near €256/mt. One logistics constraint has eased. Europe has not added refinery capacity, rebuilt middle-distillate inventories or restored normal Middle East product flows. Monday therefore looks like a repricing of geopolitical probability rather than a resolution of the physical shortage. My early-September view remains intact. Unless physical supply improves materially, I expect the current correction to prove temporary and distillates to challenge the recent highs again. The market has moved from pricing missiles to pricing sanctions, but the barrel shortage remains the same.

Kaub - Rhine Water level