Fund Spreading Drives Soybean Oil Futures Higher

Vegetable oil prices rallied on Wednesday as the trend toward higher prices in the soybean oil market broke the streak of down days in palm oil futures. However, the cargo surveyor data and the lack of new buying by Chinese and Indian sources limited the gains. Weakness in palm oil futures on the Dalian exchange also capped the rally in Malaysian prices. Crude oil prices were weak late in the overnight session ahead of weekly U.S. inventory data. Still, they rallied sharply following draws in crude oil and gasoline inventories before profit-taking drove prices down to just above overnight highs by the close of the U.S. agricultural session.

Soybean oil futures rose about 3/4 percent (December contract +25 basis points per pound) to set a fresh post-pandemic high. Stable soybean futures and spreading by the funds, which added about 3,000 contracts to their long oil share position, supported the gains. The move left the benchmark December contract just above the psychologically important 32.5-cent level. However, selling above the upper Bollinger band limited the advance. Technically, soybean oil futures have moved back into oversold territory, which may result in short-term weakness. Still, the fundamental picture should become more bearish ahead of the U.S. harvest, which will likely continue to provide support.

Palm oil prices gained more than one percent (November contract +30 ringgit per tonne), but remain more than 100 ringgit below the high set last week. Selling just below the five-day exponential moving average limited the advance and may continue to act as resistance in the short term. The fundamental outlook for palm oil is more bearish than soybean oil, which should drive the spread between the two markets wider in the coming months. However, export demand and prices on the Dalian exchange will continue to play a large role in the day-to-day movement of prices.