May Soybean Oil Contract Locked Limit-Up on Fund Spreading

Vegetable oil prices were sharply higher on Monday as higher palm oil prices triggered oil/meal spreading during the U.S. session that left the nearby soybean oil contract locked limit-up. Cargo surveyor data indicating palm oil shipments during the first 20 days of March rose more than five percent from the same period in February, drove the buying in palm oil. However, soybean oil futures were lower heading into the U.S. session. Early in the U.S. session, bull spreading in soybean oil futures pushed nearby contracts about 1 1/2 cents higher, ultimately triggering a surge in oil/meal spreading that left the nearby contract locked.

Despite the significant move in palm oil, there were bearish developments that could weigh on prices. The United States Department of Agriculture’s (USDA’s) Foreign Agricultural Service (FAS) issued an attaché report predicting record palm oil production in Indonesia for the 2021/22 marketing year. Also, a surge in coronavirus cases forced the Indian government to reimpose restrictions to slow the spread of the disease. Analysts believe the measures could decrease vegetable oil demand ahead of Ramadan, which begins on April 13.

The moves drove the spread between the May soybean oil and palm oil contracts to 12.37 cents per pound after trading as low as 9.26 cents just before the U.S. opening. The July spread rose to 12.78 cents per pound. Both levels were new highs and capped three days of widening spreads. Stable energy prices left the spread between soybean oil and heating oil futures (HOBO) at a record 2.45 per gallon, implying biodiesel production from soybean oil has never been less profitable than it is right now. The value of renewable identification numbers (RINs) had been rising to offset the decline in profitability, but profit-taking late last week drove RIN prices lower. If the trends continue, the rationalization of biodiesel capacity could occur more quickly than anticipated.

Nearby soybean oil contracts gained more than four percent (May contract +2.5 cents per pound – locked limit up), but gains in deferred contracts were smaller. Most contracts with 2022 deliveries rose less than two percent (March 2022 contract +84 basis points per pound). No specific fundamentals developments explained the outsized move (more than three cents from the early morning lows), suggesting an estimated 17,000-contract increase in the funds’ net long oil share position accounted for most of the move. However, early details of President Biden’s infrastructure plans, including focusing on renewable fuels, may have contributed to the rally.

Palm oil futures gained more than three percent (June contract +119 ringgit per tonne). However, unlike the soybean oil market, gains in deferred contracts were larger as contracts with deliveries after November 2021 rose more than four percent (December contract +128 ringgit). In addition to the other potentially bearish developments, an estimate that palm oil output in Malaysia rose about 40 percent during the first 20 days of March from the same period in February limited the gains in the nearby contracts.