Sell-Off in Vegetable Oil Futures Accelerates

Vegetable oil futures were sharply lower on Monday as overnight weakness in Chinese vegetable oil futures triggered speculative liquidation in the palm oil and soybean oil markets. Fund short oil share spreading also weighed on soybean oil futures, as did a slight decrease in energy prices. West Texas Intermediate (WTI) futures fell about 1/2 percent as concerns about rising coronavirus cases and the lack of progress in negotiations for the next U.S. stimulus package sparked worries about economic growth. However, the benchmark November contract was able to remain above the psychologically critical $40 per barrel level.

Nearby soybean oil futures fell about 1 1/2 percent (December contract -46 basis points per pound), but the declines in deferred prices were smaller, with 2021/22 contracts down less than one percent (December 2021 contract -28 basis points). The drop left the benchmark contract below the 50-day moving average for the first time since October 2. The December contract also broke through the lower end of the recent trading range, which could signal further weakness in the short term. In the longer term, cash vegetable oil prices remain relatively strong and closer to the mid-September highs than the lows set at the end of September. In the near term, the downside risk is probably limited below 32 cents, but the benchmark contract may test the late-September low just below 31.5 cents before the flows from speculative liquidation and fund spreading start to ebb. Upside resistance remains at the 34-cent level, but selling at the 50-day moving average (32.87 cents as of Monday’s close) and the 33-cent level may limit any attempt to rally prices until speculative flows reverse.

Palm oil prices dropped about 3 1/4 percent (January contract -94 ringgit per tonne). The largest factor in the decline on Monday was the acceleration in the move lower in Chinese futures. Chinese palm oil prices fell about 1 1/2 percent, and soybean oil prices declined by more than 3/4 percent on Monday. Chinese palm oil futures tested the 50-day moving average but rebounded to settle more than two percent above the low. Chinese cash palm oil prices dropped on Monday, which may indicate another test of the 50-day moving average for the benchmark January contract in the short term. However, unless cash prices fall below the lows set at the end of September, the downside price risk may be limited. If Chinese prices stabilize, palm oil futures could follow. If Chinese prices continue to move lower, the benchmark January palm oil contract could test the lows around 2,700 set at the end of September.