TACO Confused Monday: Long Hedges Bleed, Biofuels Refuse to Break

Monday punished long energy hedges built around continued escalation. Brent fell 4.7% to $83.77/bbl, August ICE gasoil lost $113/mt to $1,206.25, and September fell $80.50/mt to $1,150. August/September backwardation compressed 36.6% to +$56.25/mt, while August/December dropped 25.3% to +$216.75/mt. The screen heat crack retreated to $88.43/bbl and the combined refinery crack to $57.02/bbl. Those losses matter, but the remaining values still describe scarcity rather than balance. A one-month gasoil spread above $56/mt and an August/December spread above $216/mt remain extreme. The market liquidated geopolitical premium much faster than the physical system repaired itself.

The unresolved inventory and logistics constraints argue against declaring a new trend after one session. ARA gasoil stocks remain at their lowest level since June 2022 and 18% below last year, while Rhine water near Kaub has restricted barge loadings and pushed Rotterdam-Karlsruhe freight from about €45/mt at the end of June toward €150/mt. The United States now faces its own river constraint, with Mississippi barge rates above their 90-day averages across every major segment. Cincinnati and the Lower Ohio stand more than 51% above trend, while Twin Cities reached $49.74/ton. Cushing adds another warning where Heating Oil delivers . Stocks stood at 18.599 million barrels, only 2.599 million above Renegade Resources’ estimated 16 million barrel operational floor. Straight-line depletion takes longer, but the author’s central point is that declining working inventory starts constraining normal operations much sooner, leaving roughly two weeks before the market begins to feel the practical limit.

US biodiesel and renewable diesel data provide the clearest reason why soybean oil refused to follow energy lower. May production reached a record 497 million gallons, up from 452 million in April, while total feedstock consumption increased 24% year over year to 3.645 billion lb. Soybean oil use jumped 40% to 1.434 billion lb and supplied 57% of the entire increase in feedstock demand. Tallow use slipped only 2% to 796 million lb, but its share fell from 28% to 22%, while soybean oil’s share rose from 35% to 39%. This was not a large physical displacement of tallow. The industry expanded around a constrained animal-fat pool by running additional soybean-oil gallons. The economics therefore reflect D4 RIN generation and throughput as well as 45Z optimization. December D4 RINs finished at $2.205 after EPA granted one full SRE, two half exemptions and ruled three petitions ineligible. Zeldin’s legalistic approach remains visible, but the market treated the decision as narrow rather than a retreat from the RFS.

The same biofuel pull is visible in South America. Argentine biodiesel production reached 295Kt in April-June, up 20% from last year, while domestic use rose 12% to 237Kt. Full-year output is now estimated at 1.16 million tonnes, with 80Kt expected to move to the EU in August and 60Kt in September. Brazil produced a record 4.37 million tonnes during January-June, up 9%, under the B15 mandate. Reported soybean oil use reached 3.218 million tonnes, while soybean oil represented 77% of the disclosed June feedstock mix. These programs are removing vegetable oil from export channels while global diesel supply remains constrained. September/January soybean oil backwardation widened to 0.82 cents/lb even as crude, gasoil and refinery cracks fell sharply. That divergence shows nearby feedstock demand remains firmer than the energy screen suggests.

Sep/Jan Soyoil

Europe completed the contradiction. Gasoil fell roughly $77.50/mt, yet biodiesel and HVO flat prices lost only about $11 to $14/mt, forcing premiums wider. September RME paper traded at $408/mt, up $48, September UCOME at $525/mt, up $65, and Q4 HVO II at $1,795/mt, also up $65. Physical window activity remained selective, so the move does not prove aggressive end-user buying, but replacement costs and inland scarcity resisted the futures liquidation. A durable bearish turn now requires several sessions of further gasoil-curve compression, rising ARA and Cushing inventories, easing Rhine and Mississippi freight, weaker D4 RINs and renewed flattening in soybean oil. Until those confirmations appear, Monday looks like a leverage flush inside an unresolved global diesel and biofuel supply problem.