Open or closed?

Hormuz

The situation around the Strait of Hormuz continues to drive fuel prices and, consequently, those of many other commodities. 

The ceasefire in Iran, which was set to expire last Wednesday after two weeks, has been extended indefinitely, while the U.S. naval blockade, put in place to increase economic pressure on Iran, remains in effect. 

Peace negotiations appear to be going nowhere and the Strait remains blocked with Iran restricting passage through the key shipping route and the US increasing its naval presence to block Iranian imports and exports. Iran says that reopening the Strait is "impossible" if the US continues its blockade of Iranian ports. Both seem locked in a standoff betting the other side will blink first.

The land ceasefire is not being respected at sea and the US expanded operations beyond the Gulf to track down Iranian ships on a large scale. Last week, they boarded a sanctioned oil tanker in the southern Bay of Bengal. The vessel, part of the "dark fleet" and flying the Botswana flag, was grabbed on suspicion of "smuggling petroleum from the Iran". In "retaliation," Iran boarded a container ship trying to sail out the Strait. 

Since the de facto closure of the Strait of Hormuz on February 28th daily traffic dropped by 97%, and more than 800 ships remain stranded in the Persian Gulf. 

Iran and many others in the region are de facto closed for business.

At the time of writing, in an ever faster changing world, there are no indications that the Strait of Hormuz will soon reopen to petroleum, natural gas, and fertilizer shipments. Markets should expect continued volatility on news headlines.

Fall out and fundamentals

Until the Hormuz Strait is reopened and a ceasefire is agreed uncertainty will continue. The closure of the Strait emphasizes the vulnerability of global energy flows, and so far, the economic impact was only partially visible but should intensify in the second quarter. Recently, the intergovernmental Organization for Economic Cooperation and Development (OECD) warned of inflation and even stagflation due to rising energy prices. Meanwhile, the German economy is once again in crisis mode. The economic indicator for the German economy "Ifo index" dropped to "a pandemic level", underlining German companies' fears about the increasing negative economic impact of the war.

Increased energy prices have already led to an increased demand for edible oils and fats from the bio-fuel industry. Asian countries that are heavily dependent on oil imports from the Middle East have, since the beginning of the war, made huge efforts to increase the use of biofuels. Indonesia, Malaysia, Vietnam, Thailand, the Philippines, and even India are all looking for bio-based alternatives to diesel and gasoline. Moreover, the production of biofuels is increasing in North and South America. It may turn out that global oils and fats demand exceeds production; unless a big economic setback would kill global diesel demand.

El Niño

In addition to energy issues, markets are also looking at fundamentals such as weather. An intense El Niño, a periodic and natural warming of seawater surface temperature in the central and eastern Pacific Ocean, came on the radar. Meteorologists see warmer and drier weather in Asia during the second half of 2026, which may adversely affect crops. Parts of Australia and India are already affected by heat and drought. In India, lower-than-normal monsoon rains from June to September could reduce yields of summer crops such as soybeans, while decreasing soil moisture for winter crops like rapeseed. For palm oil, the impact is usually felt six to fifteen months later, due to crop cycles. A mild El Niño would cause less harm, but a more intense and sustained El Niño could lead to a 5-15% production drop.

In the northern hemisphere, El Niño could cause heavy rainfall in the EU and the US and disrupt autumn harvests. Latin America has a more mixed picture. El Niño tends to bring dry weather to Central America and at the same time floods in Brazil in many areas.

Besides weather problems, farmers all over the world are facing fertilizer shortages and high fuel prices. The Strait of Hormuz is also a route also used for about 30% of the global trade in urea. Short term there shouldn't be too much impact but further away the impact on food supply chains could get dramatic.

Panama

Another effect of the Middle East war is a noticeable rise in vessel traffic and tonnage through the Panama Canal. Auction transit prices increased by 180% since the war started. The January daily average of 34 vessels rose to 37 in March, with recent peaks exceeding 40 transits/day. Energy products playing an increasingly important role in the total volume. 

With every passing there is a loss of water. But the Canal Administration indicated that water levels are currently optimal, allowing the Canal to cope. Unusually heavy rainfall during the dry season has kept the Gatun and Alajuela lakes (which supply the canal with water) at maximum capacity, providing a buffer against a strong El Niño later in the year and no significant disruption is expected before December. In Panama, total rainfall in the first five months of 2023 was 47% below the historical average. Drought then (and not for the first time) disrupted/restricted canal traffic for months. 

Although El Niño certainly doesn't mean the end of the world, it is a phenomenon to watch. It's all in the intensity and duration of the natural phenomenon. But never underestimate the force of weather as market driver. Weather uncertainties will undoubtedly contribute to price volatility in the coming months.

Markets

Palm oil

Malaysia plans to increase its biodiesel blend quota from B10 to B15, starting with the introduction of B12, in order to enhance energy security and increase domestic diesel supply. Building on existing blending infrastructure, this is not expected to incur much additional costs. Malaysia produced about 975,000 mt of biodiesel, with a production capacity of 2.35Mmt. And the government is also preparing for B20 and B30 mixtures.

Longer term the issue of high-priced fertilizers, if available, also plays in the background.

With Asian petroleum refineries running dry and Indonesia going from B40 to B50 in July, to reduce diesel imports, this all sounds more than bullish but price enthusiasm was capped by export data from cargo surveyors, who noted a 25% month-on-month decrease in export shipments of Malaysian palm oil products during April 1-20. And initial estimates for production increased by 30%. Subdued Chinese imports of raw materials, particularly soybeans, could further affect the outlook for the edible oil market. Competition from South American soybean oil also led to some caution.

Higher fuel prices encourage producers to produce more biodiesel but higher palm oil prices and higher fuel prices could also discourage consumers to consume. That's how markets work.

Soybean oil

In the US, since the limit down on March 16th, the bean market has basically been in a sideways pattern. It tried to break out to the upside, briefly pushing above $12.00, but failed. The bulls need to be fed every day and without new bullish input, the path of least resistance is mostly down. And the US soybean export book remains rather disappointing though some still hope on purchases from China after President Trump's scheduled meeting with Chinese President Xi Jinping in South Korea mid-May.

Bean oil has been the star performer and the strong leg of the soy complex as it benefitted from spillover strength from petroleum and a favorable biodiesel outlook with better-than-expected demand. Despite a record crush bean oil stocks saw a draw indicating that demand for oil is extremely strong. But some start thinking the market is in overbought territory.

Bean oil prices could come under pressure if biodiesel producers use foreign feedstock. In addition, South American offers are almost $400 lower than the artificially inflated US domestic prices. In Europe, demand for soybean oil from the energy sector is low, leading to higher inventories and downward pressure on prices.

The Brazilian record harvest is about done but all beans still need to be counted to know exactly how much it is. Argentina's harvest is ongoing while plantings in the US are on their way. Soybean Futures saw some speculative buying as dry weather persists from the Canadian border south into West Texas with intense winds, low humidity and wildfires. In two states, Michigan and Wisconsin, heavy rainfall and flooding have delayed planting, but weather should be improving there.

Rapeseed oil

Rapeseed prices fluctuated significantly, following the evolution of petroleum prices. The market got also support from strong demand for rapeseed and meal from the UK and northern EU countries, as well as a recovery in rapeseed crush in EU. But new business remains scarce due to price volatility and lack of predictability for coming months.

On the supply side, rapeseed imports from Australia continued to weigh and the prospect of a relatively good crop in EU in 2026 is also capping gains. But there are still 2-3 months to go before harvesting and the risk of war in Ukraine also remains a concern. 

Australian data showed that critical fertilizer shortages are driving changes in planting intentions, against a backdrop of rising costs. Local analysts think the rise in fertilizer prices will cause a shift from wheat to rapeseed cultivation. But there is also risk of drought, which "discourages investing in fields" that can partly or totally be lost anyway.

Last Thursday, 23rd April, the German Bundestag finally adopted the updated regulation on "greenhouse gas emission reductions" in accordance with the EU's RED III directive. The targets through 2040 are now set by law which should provide investment/planning security.

The main changes cover the mandatory greenhouse gas emission reduction targets for road transport fuels: in 2026: 12%, in 2027: 17.5% and in 2040: 65% (previously: 59%). For conventional biofuels (cultivated biomass), the ceiling is raised: from 4.4% to 4.9% in 2026, then gradually to 5.8% in 2032. The "double counting system" for advanced biofuels is abolished, which means that a larger physical volume will be needed to reach the same quota.

These more ambitious targets are expected to lead, in the medium term, to higher prices for road fuels. For alternatives such as "hydro treated vegetable oil diesel" (HVO100), biomethane and electricity the economic situation continues to improve. The price difference between conventional diesel and HVO100 decreases with each quota level.

Prices of rapeseed oil have increased mainly due to the expected increase in demand for biofuels in North America and the EU. And in this end-of-season period, it is also becoming more difficult to obtain non-genetically modified rapeseed oil. Overall activity in the EU biodiesel market has slowed somewhat for various reasons, and the abundant supply of genetically modified rapeseed oil is putting pressure on the market. It will be interesting to see how all this settles in after the new legislation in Germany, and when and how other member states will follow.

Sunflower seed oil

Sunflower seed stocks from the old crop are dwindling as time goes by, supporting seed and oil prices. Sunflower oil has also followed the upward trend of competing oils. However, the new harvest is traded at much lower prices. 

Plantings in the Black Sea region (Bulgaria, Romania, Turkey, Ukraine, Russia) can benefit from an overall good soil moisture situation. And the acreage expansion is seen as a sign for an exceptional big harvest. However, in recent years we have seen two promising record crops collapse in the final phase of the growing season. Keep your confidence alive, but rely solely on what is tangible. We'll see when harvest is done!

Butter

∞

∞

Please reach out to your preferred AVENO contact for questions, comments and feedback.