Malaysian Developments Drive Veg Oil Prices Sharply Higher

Vegetable oil futures jumped sharply on Monday despite a 3 1/2 percent decline in West Texas Intermediate (ETI) futures prices. Bullish world vegetable oil fundamentals and overnight strength in palm oil prices following the Malaysian government’s extension to slow the spread of the coronavirus supported vegetable oil values. Crude oil prices dropped on concerns about the economic outlook. The lack of progress on a U.S. stimulus package suggests the U.S. Congress will not pass a new round of measures to boost the economy before the election, triggering selling across U.S. equity and energy markets. The selling drove the benchmark December contract further below the psychologically critical $40 per barrel level and left it to settle at the lowest price since October 2.

Nearby soybean oil prices gained about 3/4 percent (December contract +35 basis points per pound). However, the gains in deferred contracts were smaller (December 2021 contract +15 basis points). The benchmark contract traded substantially higher early in the U.S. session but selling above the upper Bollinger band limited the advance. The continued rally in spreads suggests nearby demand for soybean oil remains strong despite the seasonal uptick in crushing volumes that accompany harvest. However, the spreads may also reflect the liquidation of the large short oil share position built by funds over the last several weeks. While vegetable oil prices are likely to remain well supported in the short term due to bullish world vegetable oil fundamentals, soybean oil prices are above the upper end of the recent trading range and closing in on the mid-September high. The most critical fundamental situation is the Chinese supply shortfall, which has driven up cash prices to mid-September highs. If Chinese prices continue to move higher, soybean oil futures could extend the rally’s most recent leg from early October lows. However, if Chinese prices reverse, soybean oil futures could fall below 33 cents in a relatively short period. A sell-off in oilseed prices also remains a substantial short-term risk. Soybean export demand has been robust, but improving Brazilian weather conditions could trigger the liquidation of long soybean positions by funds. If there is a sell-off in soybean futures, The Jacobsen believes soybean oil prices would fall less than soybean meal prices, but soybean oil values could still decline sharply. Nevertheless, The Jacobsen believes soybean oil prices will remain well supported in the short term. Resistance remains at the upper Bollinger band (34.47 as of Monday’s close) and the mid-September high of 35.49, while support remains at the 50-day moving average (33.14 as of Monday’s close) and the mid-October low of 32.28 cents.

Palm oil prices jumped sharply, with nearby contracts gaining as much as 5 1/4 percent (January contract +124 ringgit per tonne) and the benchmark January contract setting a new life-of-contract high. Two fundamental developments triggered the sharp increase in values. The first was the extension of the Malaysian government’s efforts to curb the spread of the coronavirus. On Friday, a trade association estimated the restrictions, including a 50-percent reduction in production capacity for palm oil producers in affected states, could reduce Malaysian output by 300,000 tonnes per month. The second fundamental development was the release of cargo surveyor data indicating Malaysian palm oil shipments during the first 25 days of October rose seven percent from the same period in September. The combination of falling seasonal output with the coronavirus restrictions and strong export demand drove concerns that inventories, already near the lowest level in the last three years, could remain tight. Like soybean oil futures, the gains in deferred contracts were smaller, but the difference was less significant in the palm oil market. However, unlike the soybean oil market, there is little chance the rally in spreads is due to the liquidation of speculative positions and more likely reflects concerns about the strong export demand and limited output. The concerns about tight inventory levels will likely continue to support palm oil prices in the short term. However, the palm oil market remains more sensitive to a reversal in the rally in either Chinese cash prices or the Dalian futures market. The mid-September high for the most actively traded contract (3,104 ringgit) remains Short-term resistance for palm oil. Beyond that, the early January high of 3,134 ringgit could also trigger technically-driven selling. Support is likely to be found at the 3,000-ringgit level and then at the 50-day moving average (2,833 ringgit as of Monday’s close).