Soybean Oil Futures Decline on Profit-Taking in Soy Complex

Vegetable oil markets were mixed on Tuesday as palm oil, and Dalian prices played catch up to the rally in soybean oil futures on Monday, but selling across the soybean complex weighed on soybean futures. Profit-taking above the psychologically critical $10 level in soybean futures drove the selling in the complex.

Crude oil prices rose sharply following bullish inventory data from the American Petroleum Institute (API), but remain almost $2 below the crucial $40 per barrel level. Still, the rally helped narrow the spread between soybean oil and heating oil prices, which suggests better profitability for biodiesel producers. If the trend continues, soybean oil demand from biodiesel producers could set a record before the end of the year.

Soybean oil futures fell about 1/2 percent (December contract -14 basis points per pound). Despite the decline, the benchmark December contract remained above the critical 34-cent level as buying just above that level limited the fall. Fund spreading also limited the drop. Selling above the upper Bollinger band weighed on prices and reversed overnight gains. Vegetable oil fundamentals remain bullish, but futures may consolidate recent gains and trade within a range between 34 and 34.5 cents in the short term.

Palm oil prices gained about 1 1/2 percent (December contract +45 ringgit per tonne) to set a new post-pandemic high. The rally over the last two days has driven the benchmark December contract above the psychologically critical 2,900-ringgit level. The move also set new life-of-contract highs for the December contract and left the continuous most actively traded contract at its highest price since January 22. While the path of least resistance for all vegetable oils is higher, palm oil futures may also consolidate the recent gains.

The spread between soybean oil and palm oil dropped to about 2 1/2 cents (December contracts) on Tuesday. For the spread were to fall to parity, as it did earlier in the year, palm oil futures would have to rally above 3,100 ringgit while soybean oil remained at its current level. Given the relative fundamentals, there is some potential the spread will continue to narrow. Still, given the current price levels for both commodities, it will be difficult for the spread to fall to the low end of the historical range if vegetable oil prices continue to rally. If the spread widens in the coming weeks, it will make U.S. soybean oil exports less competitive, which could slow shipments.