Vegetable Oil Prices Rally Despite Plunge in Crude Oil

Vegetable oil prices rallied following the long holiday weekend in the U.S., as bullish world vegetable oil fundamentals continued to outweigh plunging crude oil prices. West Texas Intermediate crude oil futures fell by about 7 1/2 percent on Tuesday to push the decline over the last four days to nearly 15 percent. Concerns about the resurgence of the pandemic and the lingering impact of lockdowns imposed to slow the disease contributed to the weakness. With energy prices dropping sharply and vegetable oil prices remaining within the recent trading range, the spread between soybean oil and heating oil (HOBO) has jumped to new highs. The soaring HOBO spread suggests biomass-based diesel production profitability is declining, which could lead to slowing production in the coming weeks.

Soybean oil futures gained more than 1 1/2 percent (December contract +51 basis points per pound), which left the benchmark December contract back above the psychologically critical 33-cent level. Trading was volatile, with futures trading in a range of almost one cent. Buying at the five-day exponential and 10-day moving averages limited a decline shortly after the U.S. open and drove prices back into positive territory for the day.

Palm oil prices rose more than 2 1/4 percent (November contract +67 ringgit per tonne) after falling more than one percent on Monday. Gains in vegetable oil prices on the Dalian exchange and weakness in the Malaysian currency supported the rally. Traders are looking forward to the monthly Malaysian Palm Oil Board (MPOB) report, scheduled for release on Thursday to gauge the trend in output. Expectations of a five percent increase in inventories due, in part, to seasonally rising production limited the gains. Selling at the upper Bollinger band also limited the advance.