Is the Middle East conflict a Game Changer?

With palm oil production peaking and increasing palm oil inventories, with ample global rapeseed and sunflower seed harvests nearing completion and the American soybean crop coming of the land, there is a lot of “oil weighing on the market”. But this is a normal annually occurring event at this time of year, after which stocks tend to go down till the next big push from South American soybeans comes, early in the next year.

It felt like the entire oilseed complex was pressured by the US soybean crop, the present and future Brazilian soybeans and the increasing palm oil stocks. But especially ample sunflower seed oil offerings pushed edible oils and fats lower. Not to mention global subdued demand.

Of course, weather, geopolitics and economics which dictate the speed of the inventory drawdown are unpredictable. This past week we saw troubles in Israel exploding unexpectedly. Almost all went on hold. Energy prices firmed despite economic woes giving support to edible oils and fats which mostly all ended the week a bit firmer.

Fearing escalation and unpleasant surprises buyers and sellers hesitate to take positions and keep sidelining till the dust settles. But this geopolitical risk could also turn into another black swan event. Petroleum and its derivatives saw higher weekly closes due to escalating tensions coupled with additional Russian sanctions. A further escalation could have a domino effect across all markets, especially if energy supplies are threatened. The previous panic move when Russia invaded Ukraine showed that if one can't get something, he will often pay whatever it takes to get it, the price won’t matter. Precautionary hoarding or stockpiling can’t be ruled out either. Uncertainty subsists.

MARKETS

Palm oil

The continuing peak production season made palm oil stocks in origin grow which kept prices of crude palm oil under pressure. Malaysian palm oil stocks rose to their highest level since October 2022, mainly due to weakening demand as also edible oil stocks in India, China and other importing countries remain high.

The latest palm oil statistics from the Malaysia Palm Oil Board last week showed strong palm oil production of 1.83Mmt in September and end month stocks at 2.31Mmt, a more than 9% stock increase compared to August. The market stayed largely “neutral” and expects crude palm oil futures, all the rest being equal, to trade in a range between RM3,600 and 4,000/mt, in fact continuing more or less moving sideways until…. demand picks up, production drops and stocks go down.

Soybean oil

In its October WASDE report, last Thursday, the USDA reduced the US soybean crop by 1.1 to 111.7Mmt. Yields were revised down to 3.3mt/ha. Soybeans closed higher after the release as the report fueled some short covering of some speculators taken by surprise. Although not a dramatic move upwards and more a signal that the earlier downward trend had halted. The USDA also raised the use of soybean oil for biodiesel production in the US. Heavy rains delay the harvest progress which should be around 50% by now.

The spread between US and EU soybean oil dropped to about $113.

Generally, higher energy prices and the conflict in Israel were supportive and may dictate the future market direction until fundamentals kick back in, like the lack of export demand and the consequences of low water levels on the Mississippi.

Rapeseed oil

In EU, during October, rapeseed futures trended lower quite fast until it stopped! Petroleum prices, which had fueled an earlier price recovery took a dive, putting renewed pressure on the entire biofuel sector and rapeseed complex. Also, seed imports from Ukraine weighed on the market despite continuous Russian attacks on more Ukrainian ports.

The rise in petroleum prices following the attacks on Israel was apparently not yet enough to convincingly send rapeseed prices up again. Neither was the supportive USDA’s WASDE report (yet).