Tight Stocks and Flooding Drive Palm Oil Prices Higher

Vegetable oil prices continued to rally on Wednesday, but once again, palm oil outperformed, driving the spread between the March soybean oil and palm oil contracts back down to parity. The Jacobsen believes the spread could fall to a two-cent premium for palm oil ahead of first notice day for the soybean oil contract. Argentine port workers’ recent strike supported soybean oil prices and limited the two markets’ diverging fundamentals. The strike’s resolution has left the spread to reflect the relative levels of inventories. Malaysian palm oil inventories likely fell to the lowest level in more than a decade at the end of December, while U.S. soybean oil stocks remain above year-ago levels. In addition to the tight inventories, excessive rainfall is also hampering Malaysian production, adding to the market’s relative bullishness. The falling spread will add to the already robust export demand for soybean oil, which should not be an issue while inventories are ample. However, suppose the demand for U.S. exports rises substantially in the coming months. In that case, it will reduce the supply available at the end of the marketing year, when The Jacobsen expects a substantial increase in the demand for soybean oil from increasing renewable diesel production.

Soybean oil futures gained about 1/2 percent (March contract +24 basis points per pound) as short oil share spreading by funds limited gains despite another one percent gain in soybean futures. The benchmark contract rose above the 44-cent level during the session. However, selling above the upper Bollinger band added to the pressure from fund spreading to leave the contract to settle back below that level, after settling above it on Tuesday. The spread between the upper Bollinger band and the five-day exponential moving average has widened in the past week, which could trigger some short-term technically-driven selling. Still, The Jacobsen expects bullish world vegetable oil fundamentals and concerns about South American soybean production to limit any decline.

Palm oil prices jumped more than three percent (March contract +122 ringgit per tonne) as concerns about excessive rainfall and potential flooding added to the expectations the MPOB would report a sharp decline in palm oil inventories at the end of December. The rally left the benchmark contract above the 3,800-ringgit level and at its highest point since February 2011. Gains in vegetable oil futures on the Dalian exchange also added to the bullish tone, as did increases in energy prices, which drove the benchmark West Texas Intermediate (WTI) contract above the $50 per barrel level for the first time since late February. Like the soybean oil market, palm oil prices may be vulnerable to a short-lived technical correction. Still, until the seasonal decline in production passes and inventories start to build, any drop in prices will likely be minor.