Concerns About Production Drive Palm Oil Futures Higher

Concerns About Production Drive Palm Oil Futures Higher

Vegetable oil markets were mixed on Wednesday as growing concerns about excessive rainfall in Malaysia and Indonesia helped support palm oil prices. In the soybean oil market, fund spreading continued to weigh on prices. Weakness in crude oil futures also contributed to the selling in soybean oil. West Texas Intermediate (WTI) futures fell about 1 1/2 percent (November contract -67 cents per barrel). However, an afternoon rally from the day’s lows left the benchmark November contract to settle right at the psychologically critical $40 per barrel level.

Nearby soybean oil contracts fell 1/4 percent (December contract -6 basis points per pound) or less. However, the declines in deferred contracts were more substantial, with prices in the curve’s back end falling by one percent (May 2021 contract -31 basis points). Selling above the 15-day and 20-day moving averages limited an early attempt to rally, while buying below the 33-cent level, the five-day exponential and 10-day moving averages limited the decline. Despite a sharp decline in the last 10 minutes of trading, the benchmark December contract still settled above the 33-cent moving average.

Traders are looking forward to the United States Department of Agriculture’s (USDA’s) monthly supply and demand reports, scheduled for release on Friday. Position squaring ahead of USDA’s latest forecasts may drive price action on Thursday, which could be supportive. However, Brazilian planting delays have caused concerns that U.S. soybean shipments to China may be larger than expected, which may limit the supplies available to crushers. This view has driven soybean meal futures sharply higher and triggered a substantial increase in funds’ short oil share positions. If expected rainfall next week allows Brazilian planting to catch up, The Jacobsen expects a reversal of those positions to drive soybean oil higher. However, if planting remains slower than average, soybean and soybean meal futures may continue to rally, but fund spreading will limit soybean oil gains.

Palm oil prices jumped about two percent (December contract +52 ringgit per tonne). In addition to the potential impact of La Niña on production, concerns about measures to slow the spread of coronavirus in Malaysia also contributed to the bullish tone. Buying at the five-day exponential moving average limited an attempt to drive prices lower at the opening while selling just below the 2,900-ringgit level limited a sharp advance at the beginning of the afternoon session. Bullish production data from the Malaysian Palm Oil Association (MPOA) triggered the sharp rally at the resumption of trading. However, weakness in energy prices and profit-taking ahead of the resumption in trading on the Dalian exchange limited the gains. The return of the Chinese markets and speculators could impact the trend in prices in the short term. However, given that Chinese traders have not had a chance to react to the recent rally in vegetable oil prices, The Jacobsen expects a sharp rally in Chinese prices as trading resumes Thursday. After the reopening of the Chinese markets, palm oil traders will look forward to the USDA data on Friday and the Malaysian Palm Oil Board report on Monday.

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