Despite large backwardation in Diesel BOGO deeply in contango

The reality is that despite gasoil backwardation of +$16.75/mt to September, BOGO (Bean Oil Gas Oil spread) is in contango (carry) of nearly $25/mt. This truly represents the perfect reality of the current situation with a significant reduction in global demand for Biodiesel/RD through September and particularly through July, accounting for $21.46/mt of this carry (85%). The divergence between these markets highlights the structural challenges facing the biofuels sector, as feedstock prices remain elevated while demand for biodiesel and renewable diesel continues to lag.

Typically, traders would navigate this environment by selling the BOGO roll and carrying their overproduction. However, European paper markets are complicating this strategy with a substantial backwardation in premiums, especially for Fame 0 (F0) showing at least +$80/mt for Q2/Q3, with similar patterns for forward physical prices. This pronounced backwardation likely reflects F0's greater dependence on rapeseed oil rather than soyoil in Europe, mirroring the domestic feedstock market's own backwardation. Even more puzzling are UCOME FOB premiums and forward physical prices showing +$70/mt backwardation from Q2/Q3. While these structures defy fundamental logic given the broader demand concerns, the liquidity in paper markets trading at these levels makes it difficult to position against the prevailing sentiment.

Rhine River depth issues at Kaub, Germany, are affecting jet fuel traffic but also rapeseed traffic—a critical factor for European biodiesel production that relies heavily on imported rapeseed. This logistical constraint is impacting freight rates and availability across the continent. Although these issues are primarily affecting northern and central regions of the Rhine, recent rains and upcoming snowmelt should improve the situation soon. Meanwhile, RSO (rapeseed oil) prices have climbed significantly, with prompt 5-40 days loading assessment rising to €1,080/t, further squeezing already thin biodiesel producer margins.

In South America, the soybean harvest is completing in Brazil and starting in Argentina, which should theoretically improve supply conditions. However, Paranagua FOB soyoil premiums haven't changed much despite strike disruptions, with June cargoes offered at +100 points and still bid at even. OND (October-November-December) is bid -200 with few offers appearing in the market. This premium structure primarily reflects uncertainty related to Brazil's biodiesel blending requirements, which may be halted for a period of 90 days according to recent industry reports. This potential pause in the mandate would significantly reduce domestic demand for soyoil in Brazil, creating export pressure and affecting regional pricing dynamics.

The U.S. market continues to struggle with profitability challenges, as biodiesel screen crush margins remain approximately 23¢/gal negative despite higher D4 RINs trading at 81¢/gal. Recent data showing February U.S. renewable fuel consumption fell to a four-year low is particularly troubling, with a 30% decline in domestic renewable diesel blending. This demand destruction is occurring while the UK launches an anti-dumping investigation into U.S. HVO imports, adding another layer of uncertainty for American producers looking to export their way out of the domestic oversupply situation.