Inflation Fears and Technical Buying Drive Soy Oil Higher

Agricultural and energy prices surged higher on Wednesday, driving soybean oil prices sharply higher. Most palm oil futures were modestly higher, but the nearby contract fell by one percent in cash-driven trading. A combination of inflation hedging flows, and follow-through technically-driven buying drove the gains during U.S. trading hours. However, strength in oilseed complex futures on the Dalian exchange may have also contributed to the bullish tone.

The moves broke the trend in the spread between May soybean oil and palm oil futures, pushing the spread above the upper end of the recent trading range. However, selling above the 10-cent level limited the advance and left the spread to settle at 9.92 cents per pound. Despite more modest gains in deferred soybean oil contracts, the spreads between July and September contracts both rose to fresh life-of-contract highs. The July spread settled at 13.78 cents, while the September spread ended the day at 12.41 cents.

The spread between soybean oil and heating oil futures (HOBO) rose modestly as gains in energy prices largely offset the sharp increase in soybean oil futures. The advance left the HOBO spread just below $2.25 per gallon and in the upper end of the recent trading range. After testing the upper trend line in the long-term trading channel twice in the last two weeks, the upside risk for the spread has likely increased. That said, the gains in energy futures could signal the beginning of a new leg higher that would pressure the spread.

Nearby soybean oil futures gained about two percent (July contract +107 basis points per pound), but bull spreading limited the advance in 2021/22 contracts to less than 1 1/4 percent (December contract +47 basis points). The move drove the benchmark contract to settle above the 20-day moving average for the first time since March 25. It also left the benchmark contract at its highest price since it set its life-of-contract high on March 24. However, the contract will need to hold the critical 52-cent level to confirm the breakout and a new leg higher. If the market sells off on Thursday, it could signal a test of the 50-day moving average in the coming weeks, but with the contract gaining more than 5 1/4 percent in the last two days, the downside price risk appears to be fading. If It is the beginning of a new leg higher, there is little technical resistance until the benchmark contract reaches the 54-cent level.

Nearby palm oil futures gained less than 1/4 percent (June contract +4 ringgit per tonne), but deferred contracts rose by as much as one percent (May 2022 contract +36 ringgit). Overnight strength in crude oil prices and the rally in vegetable oil markets on the Dalian exchange helped limit the downside. However, concerns about rising production continued to limit gains as traders await cargo surveyor data, scheduled for release on Thursday. The uncertain fundamental outlook left technical to drive trading on Wednesday with buying below the five-day exponential moving average, limiting an attempt to decline during the morning session. However, as prices rallied during the afternoon session, selling above the 20-day moving average left the benchmark contract to settle 1 1/2 percent below the high of the day.