Profit-Taking in Palm Oil Drives Drop in Soybean Oil Futures

Vegetable oil prices moved lower on Monday as profit-taking in palm oil set a negative tone for the day. Soybean oil futures managed to erase some of the overnight declines on a rally in crude oil prices during U.S. trading hours but still settled lower. The relative outperformance of soybean oil futures helped drive the spread between soybean oil and palm oil prices back above parity. However, the spread remains more narrow than the relative fundamentals would suggest for fair value.

Soybean oil futures declined by about 3/4 percent (September contract -21 basis points per pound). The decline left the benchmark December contract just above the psychologically critical 30-cent level. The 200-day moving average provided resistance for the fifth consecutive day. With the acceleration in the move lower on Monday, it may signal that level is the upper end of a new trading range.

Palm oil futures fell more than 3 3/4 percent (October contract -106 ringgit per tonne) to erase the gains of the last two days. Profit-taking at the upper Bollinger band triggered the move lower, but buying below the five-day exponential moving average limited the decline. Whether palm oil prices can reverse the drop will depend, in part, on expectations for palm oil production in the coming months. The Jacobsen expects the Malaysian Palm Oil Association to estimate a month-over-month reduction in output during July of less than 10 percent, which is relatively normal given the sharp increase in production in June relative to May. However, that report may provide the catalyst for prices to test the recent high at 2,790 ringgit.