Position Squaring Drives Vegetable Oil Prices Lower

Position Squaring Drives Vegetable Oil Prices Lower

Vegetable oil prices fell on Wednesday as position squaring ahead of end-of-week reports weighed on prices despite a sharp rally in crude oil prices. Crude futures recovered less than half of the large decline posted Tuesday on mostly technically driven buying and a bounce in equities markets. The combined moves make biomass-based diesel production more profitable than prices indicated on Tuesday. However, the spread between soybean oil and heating oil prices remains relatively wide, which could still imply a slowdown in a portion of world vegetable oil demand.

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Soybean oil futures fell about 1/2 percent (December contract -19 basis points per pound). The decline still left prices in the current trading range and the benchmark December contract above the psychologically critical 33-cent level. Buying at the five-day and 10-day moving averages helped limited the decline. The market is forming a pennant pattern, which typically suggests prices will continue to follow the trend they were in before trading sideways. In this case, that would imply futures will continue to move higher in the short term. However, with the World Agricultural Supply and Demand Estimates (WASDE) report scheduled for release on Friday, the fundamentals for soybean prices could also direct the short-term trend.

Palm oil prices dropped about two percent (November contract -57 ringgit per tonne) on concerns about rising production. News that the Indonesian government would vary tax rates on palm oil exports to support its biofuel initiative also raised concerns about slowing export demand and weighed on prices. Like the soybean oil market, palm oil futures seem to be forming a pennant. Also, like the soybean oil market, a fundamental report, scheduled for release September 10, will likely provide the short-term trend for prices.

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