Profit-taking drove soybean oil prices lower on Thursday, while palm oil prices continued to rally. The spread between January soybean oil and palm oil contracts fell back below parity on Thursday but remained just above the low set in late October. The spread has collapsed by nearly two cents since the January contract became palm oil’s benchmark contract in mid-October. A sharp rally soybean meal futures has driven funds to build a sizeable short oil share position, which, combined with multi-year lows in palm oil inventories, has weighed on the spread between soybean oil and palm oil prices. Many importing countries will switch from palm oil to soybean oil when the spread reaches parity, contributing to the strength in 2019/20 U.S. soybean oil exports. If funds do not liquidate the short oil share position or soybean futures reverse recent gains, the spread could fall as low as two cents below parity. If the spread continues to move lower, The Jacobsen expects analysts to raise forecasts for U.S. 2020/21 soybean oil exports, tightening stocks, and driving price projections higher.

Nearby soybean oil futures fell less than 1/2 percent (January contract -14 basis points per pound) on light profit-taking following the sharp rally in futures on Wednesday. Declines in deferred contracts were more substantial (December 2021 contract -28 basis points). Despite the drop, the benchmark contract remained above the upper Bollinger band but below the psychologically important 37-cent level. Selling above that level in the January contract limited gains on Wednesday and triggered additional profit-taking on Thursday.

Despite the resistance at the 37-cent level for the contract with the most open interest (January), the most actively traded contract (December) remained above that level after Thursday’s decline. The 37-cent level is particularly important because it is a round number and is just below the 138-percent Fibonacci retracement level (December contract 37.01) from the mid-September high to the early October low. Suppose the December contract can hold above 37 cents, and the January contract can move above it. In that case, there is little technical resistance until the continuous most actively traded contract reaches the December 2016 high at 38.35 cents. Given the strong rally in world vegetable oil prices and the historically wide spreads between soybean oil futures and other price series, The Jacobsen expects soybean oil prices to remain well supported in the short term. End users should use any substantial setbacks to extend coverage.

Nearby palm oil prices gained more than 1 1/4 percent (January contract +45 ringgit per tonne), but gains in deferred contracts were smaller (November 2021 contract +6 ringgit). Concerns about tight inventories and the seasonal decline in output contributed to the strength, as did a rally in palm oil prices on the Dalian exchange. However, selling at the 3,400-ringgit level limited the advance. Still, the move higher left the benchmark contract above its upper Bollinger band (3,388 ringgit as of Thursday’s close) and at a new life-of-contract high.

Over the last two days, the rally drove the relative strength index (RSI) for the benchmark contract into oversold territory. Combined with the weakness in energy prices during U.S. trading hours, the technical indicators could trigger profit-taking and a short-term decline. However, bullish world vegetable oil fundamentals will likely limit any selling. The Jacobsen expects short-term support for the January contract at the 3,300-ringgit level, which sits just above the five-day exponential moving average (3,293 ringgit as of Thursday’s close). Beyond that, the 62-percent Fibonacci retracement level (3,173 ringgit) from the February 2011 high to the November 2018 low on the monthly chart for the continuous most actively traded contract should provide substantial support. That level has acted as significant resistance to the last two rallies on the monthly chart (December 2016 and December 2019).

West Texas Intermediate (WTI) futures fell more than one percent (December contract -$0.49 per barrel) following the release of bearish weekly inventory data. The Energy Information Administration (EIA) reported a surprise build of 4.3 million barrels in U.S. crude oil inventories for the week ending November 6. Analysts expected a 913,000-barrel drawdown. The report was even more surprising given that data from the American Petroleum Institute (API) released on Tuesday showed a 5.3-million-barrel drawdown in U.S. stocks. In addition to the conflicting reports, EIA data indicating robust demand for refined products helped limit the decline.