Vegetable Oil Prices Fall on Export Concern and Oilseed Drop

Vegetable oil prices declined on Tuesday as concerns about the potential for slowing export demand pressured palm oil prices and lower soybean futures weighed on soybean oil values. Despite a sizeable decline in soybean oil futures, the benchmark contract remains within the last week’s trading range. However, the contract settled below the five-day exponential moving average for the first time since January 22. Typically, dropping below that level would be bearish in the short term, but prices rallied more than three cents from the January 23 low to Monday’s life-of-contract high. That said, a break in the spreads accompanied the decline on Tuesday, suggesting there is a higher probability of the more typical reaction, at least in the short term. Over the next week, traders will focus on expectations for the upcoming United States Department of Agriculture’s supply and demand projections, scheduled for release on February 9, and position squaring ahead of the report could be the primary driver of price movement.

Nearby soybean oil futures fell nearly 1 1/2 percent (March contract -65 basis points), but the liquidation of bull spreads limited the declines in deferred contracts (December contract -38 basis points). There has been a substantial decline in soybean spreads over the last two days, which could continue to weigh on soybean oil spreads, especially if Argentine growing conditions remain favorable. Forecasts suggest a period of drier-than-normal weather in Argentina will extend through the first half of February. Still, recent rainfall bolstered soil moisture to levels that should support crop development through that period. The key to yields in Argentina and the direction of the soybean and soybean oil markets will be the outlook for rain in the second half of the month. At that point, most of the crop will be in the critical pod filling stage, and the plants will require rain to meet current expectations for yields. If the outlook remains drier-than-average, The Jacobsen expects any setback in soybean oil prices and spreads to be short-lived and predicts the benchmark contract will set a new life-of-contract high before the end of the month. If rainfall is sufficient for pod filling, the benchmark contract could test support at the 42-cent level.

Palm oil futures dropped nearly three percent (May contract -96 ringgit per tonne) following the long holiday weekend. The combination of cargo surveyor data and news that the Indian government planned to raise taxes triggered early selling. However, concerns about the increase in Indian taxes slowing shipments in February drove prices steadily lower throughout the session and left the benchmark contract to settle near the day’s low. Buying at the five-day exponential moving average limited the decline on Tuesday. Still, the benchmark contract is likely to test the 50-day moving average just below 3,250 ringgit in the coming days. If the benchmark contract breaks through that level, it could test the recent lows just above 3,100 ringgit. In addition to the monthly data from the Malaysian Palm Oil Board (MPOB), traders will also focus on cargo surveyor data for the first 10 days of February. If the data continues to suggest weak export demand, palm oil futures could fall to 3,000 ringgit. However, if there is a sharp increase in shipments, The Jacobsen believes the benchmark contract could rally above 3,400 by the end of next week.