A turnaround led by palm oil.

With spring on the horizon, a more or less overall bearish sentiment suddenly turned into more constructive attitudes. Edible oil markets were driven by the upward surge in palm oil futures, which are now at their highest in a year on the Kuala Lumpur Exchange, mainly due to falling inventories in palm oil producing countries and rising petroleum prices. A well balanced, but fragile, global oils & fats supply and demand outlook got all shook up.

Of course, most bearishness had already been factored in, global biodiesel mandates really started kicking in, there are still a lot of shorts in the market, India and China -whom had been sidelining for a while- now see decreasing domestic stocks and increasing prices, optimistically the IMF and OPEC+ revised their world GDP forecast slightly upwards, potential interest rate cuts are perceived as an opportunity for demand growth, the International Energy Agency sees less production of petroleum, Brent rose above $85 and bitcoin broke record after record. The sky is the limit!

And it may very well be that we are bottoming out and China and India have their buying shoes back on. But caution is needed. It is still unclear where the Western and global economies are heading. As a sign of the times: due to the unrest in the Red Sea, container shipping is using more expensive alternative routes. Yet the price of container freight has already fallen by 17% since the end of January. This points to a slowing global economy, which translates into lower demand for goods and therefore requires less container transport. Let’s hope the sky doesn’t fall down. But “When it crumbles, we will stand tall, face it all together….”

Markets

Palm oil

After a declining price trend during in the past two years, in the last two weeks the market got fireworks from bursting palm oil prices carrying in its wake the global edible oil complex to higher ground. This was mainly caused by the observation of low palm oil stocks in Malaysia and Indonesia which account for 85% of global production. 

A stagnating palm oil production and the growing use of palm oil for biodiesel production limits the availability of the world's most produced vegetable oil and supports it price: implementing biodiesel mandates in Malaysia and Indonesia did limit exportable volumes.

It is normal to see seasonal low stocks this time of year, and end February Malaysian stocks (1.92Mmt) were at their lowest since July. But the outlook for stagnating, or maybe even declining, production is worrisome in a world with a fragile balanced supply and demand. And when palm oil production falls more than exports fall and when this is coupled to plans to increase domestic biodiesel production, this will eventually result in still lower stocks.

Palm trees, unlike oilseeds, are not planted every year. They only start bearing fruit after four years and need to be replaced after 25-30 years. They produce year-round and during their lifetime the yields of the trees grow to decline after peaking. Today many plantations have trees that need replacing and expansion potential of plantations is limited (deforestation, etc.). Replacing all old trees at once would lead to an immediate lower production as young trees bear even less fruits…

It can be argued that not palm but other oils should gain in price and probably other oils will gain in price to close the spread as the handling of palm oil (in fact a fat) is more expensive than e.g. sunflower seed oil. The palm oil market structure is to remain in an inverse, indicating low stocks on nearby. But if the expected abundant supply of soybeans in South America, as well as the gradual seasonal recovery of palm oil production (peaking Sep/Oct) both materialize soon, the soup may not be eaten as hot as it is served today; which doesn’t mean prices may soon collapse.

Soybean oil

The soy complex also firmed, helped by the strengthening of other vegetable oils but also by the reduction in crop size estimates in South America which are still very much being discussed. Last week the Brazilian crop agency Conab lowered its estimate for the country's soybean crop by about 2.5 to 147Mmt, while the USDA kept a number of 155 or about 8Mmt more…. Time will tell.

This provided price support along with the fact that funds still hold record short positions. It will be interesting to see if these levels hold up as it is still unclear what it will take to actually hold the momentum of rising prices which developed since early March. It could be: the market starting to trade the planting intentions and acreage for next crop in the US or weather but it’s too soon to tell.

On Friday last week, in the US, soybeans also found support from the monthly report of the National Oilseed Processors Association (NOPA) which showed continued record crush numbers, in the US, exceeding market expectations. And although end February soybean oil stocks were up from January and the largest since June, renewable diesel continued to use more soybean oil than anticipated. US soybean oil exports picked up too, and all of this with stronger rival oils and strength in petroleum pushed soybean oil to higher levels.

It is clear that trade flows of soybean oil are adapting. Due to biofuel policies, there will be soybean oil from Argentina going to California and the uptrend in biodiesel production in Brazil, as well as in the US, will limit exports to their traditional markets. Not to speak of other changing trade patterns of other oils & fats.

Rapeseed oil

Rapeseed prices jumped to their highest level of the year in the wake of firming Canadian rapeseed values and soaring palm oil futures. Rapeseed benefited from stronger fundamentals and a revival of the global oil complex. In EU seed recovered in the last two weeks remarkably, with futures trading above €440/mt. But looking at it over a longer period it appears less spectacular, puts it in perspective and makes one wonder how sustainable this is, if the old crop lows are really behind us.

Players did reduce their rapeseed short, and rapeseed long positions gained, resulting in a, however, still net short position, which decreased by 16% last week.

Canadian values firmed after StatsCan announced that it anticipated a rapeseed acreage, for upcoming sowing, lower than market expectations and below last year. Talk of sales to China contributed to stronger prices too. Another supportive factor is the interest from biofuel producers in the US for rapeseed oil.

Sunflower seed oil

Strength from palm and other oils spilled over to the sun complex but sunflower oil kept its competitiveness versus most other oils. And as there is no real fundamental news to change the sun market, and as there is no big buying interest the market has difficulty to follow the price rise, for now. Although some origin sellers have gotten a bit prouder. But Black Sea oil offerings continued, following a strong crush activity. With the planting season approaching in EU, the focus of market participants and mainly the farmers, will turn to field activity and weather.

Petroleum

Today the US is producing more petroleum and gas than any country ever has, thanks to the shale-enabled oil and gas production developed in the past 20 years. Add to that an increasing production of renewables including biofuels. And they are not really building stocks. Demand is good and more or less in balance with supply at the present price level. Expecting weak Chinese demand, the main global driver of petroleum demand, seeing the EU economy in crisis and thinking that everybody and everything is going electric on account of the energy transition could lead to believe in noticeably less petroleum demand and downward price pressure. But what about other economies like India? And what about production cuts? The line of thought could hold nasty surprises…. Summer months are also “driving season” and firm petroleum prices always support biodiesel production and edible oil prices as well.