Soybean Oil Drops Despite Limit-Up Move in May Contract

World vegetable oil futures were generally lower on Wednesday as weakness in oilseed markets continued to weigh on prices. However, nearby soybean oil futures settled lock-limit up as strong domestic demand continued to support prices. Palm oil prices were lower on weakness in soybean oil futures on Tuesday and during overnight trading. If speculators continue to liquidate long positions in the soybean market as planting progresses, vegetable oil prices may remain under pressure. However, for soybean oil contracts with deliveries during the fourth quarter, any weakness could provide an opportunity for end-users to extend coverage ahead of potentially substantially higher prices.

Longs unwilling to sell ahead of delivery may explain the difference between the nearby contract and most of the rest of the curve. Due to the wide spread between refined soybean oil and crude soybean oil, some crushers are unwilling to sell crude oil to end-users. One way to obtain crude would be to take delivery against a long position. For end-users wanting crude soybean oil, taking delivery and paying for the logistics to get it to their plant may be less expensive than buying cash soybean oil. The economic advantage is especially true if the end-users established the long positions in early April when cash prices were 15 cents per pound below the current price. If traders are unwilling to close long positions ahead of delivery, the May contract could reach historic highs, like the crude oil contract reached historic lows when a lack of buyers trapped long positions. Friday is the first notice day for the May contract, and deliveries will indicate whether the sharp increase in prices is due to longs standing for delivery. If there are very few deliveries relative to the open interest, prices could explode. However, if sellers offer a substantial volume of contracts for delivery, the price of the May contract could drop very quickly.

Most soybean oil contracts fell more than 3/4 percent (December contract -39 basis points per pound). However, the benchmark contract rose about 1/2 percent (July contract +28 basis points), stretching the July/December spread to more than 10 cents. Most contracts traded in a relatively wide range on both sides of unchanged, suggesting hedgers are buying as speculators liquidate. Still, most contracts settled between the five-day moving average and the upper Bollinger band, indicating the trend of higher prices remains in place. However, generally supportive planting conditions and the opportunity for rapid progress over the next month are likely to increase downside price risk across the complex.

Palm oil futures dropped by about three percent (July contract -133 ringgit per tonne) as traders took profits ahead of a public holiday on Thursday that will close the market. News that Indonesian palm oil production in March rose more than 13 percent from last year also contributed to the bearish tone. However, the country’s palm oil association (GAPKI) also announced crude stocks fell to 3.2 million tonnes, down more than five percent from last year and down 20 percent from February, as strong export demand more than offset the increased output. Like the soybean oil market, most palm oil contracts remain between, or close to, the five-day exponential moving average and the upper Bollinger band, suggesting the rally remains intact. However, like the soybean oil market, continued liquidation in the oilseed complex likely increases the downside price risk.