Weakness in Soybean Prices Drives Soybean Oil Lower

Vegetable oil prices were mixed on Wednesday as follow-through buying from Tuesday’s bullish export and production data and strength in Chinese vegetable oil markets supported palm oil. Soybean oil futures were also stronger overnight but dropped sharply at the U.S. opening following sharp declines in soybean futures on news of robust export shipments from Brazil during March.

The moves left the spread between May soybean and palm oil contracts just above eight cents and at the lowest level since February 26. The spreads for the July and September contracts also declined sharply, with both falling below 11 cents. While the May spread may continue to decline in the coming weeks, the sharp move lower in soybean oil prices will likely trigger profit-taking in palm oil futures on Thursday.

The sharp decline in soybean oil and a 2 1/2-percent increase in heating oil futures pushed the spread between the two markets (HOBO) down into the upper end of the recent trading range. At $2.21 per gallon, the HOBO spread dropped nearly 10 cents but remained well above the upper trend line of the longer-term trading channel, just under $2.07.

Nearby soybean oil futures dropped by nearly two percent (May contract -107 basis points per pound). However, liquidation of bull spreads limited the declines in deferred contacts, with 2021/22 contracts falling by less than 1 1/4 percent (December contract -53 basis points). Selling in the soybean complex and meal/oil spreading by funds contributed to the weakness, but technically driven buying below the five-day exponential moving average limited the declines. Still, the benchmark contract settled below 53 cents after trading above 54 cents in the overnight session. Additional weakness in soybean futures will likely continue to weigh on soybean oil spreads.

Nearby palm oil prices rose by about one percent (June contract +43 ringgit per tonne), but gains were smaller in deferred contracts (September contract +20 ringgit). The move pushed the benchmark contract above the 20-day moving average, which will be a crucial level to hold on Thursday following the weakness in soybean oil futures during the U.S. session. Building export momentum may support additional gains in palm oil futures but will likely narrow the spread between the May soybean oil and palm oil contracts over the next several weeks.