Weather is back!
Weather is back as market driver.
The war in Iran has had different headlines every couple of hours, making it hard for markets to pick a direction. Markets are also increasingly doubting President Trump's peace narrative, as continued actions and attacks from both sides undermined hopes for peace. Ongoing fights and stop-start negotiations have kept petroleum markets tense and trade skeptical about diplomatic progress.
Globally, biofuel policies remain the foundation of support for edible vegetable and animal oils and fats, and their prices retain much upward potential. Recent price corrections were caused by profit-taking by funds and speculators. And as war fears peaked and without adverse weather, managed money longs are selling. But a weather scare can pop up any time and if the conflict persists, petroleum and edible oil prices are likely to rise further.
The market is focusing on climate and weather which are themselves also unpredictable. Attention turned to the fields and the skies, to planting, growing and harvesting conditions and to the potential fallout of an intense El Niño event.
Talk about El Niño is often exaggerated, and its overall impact generally limited. However, the predicted intensity of this year's cycle has caught the market's attention.
Now shipping analysts warn El Niño could considerably impact shipping across many sectors, worsening the disruptions already caused by the Strait of Hormuz crisis and congestion in the Panama Canal. If canal restrictions force grain and oilseed shipments from the America's to reroute around the Cape of Good Hope, transit times could increase by up to 50%, thereby reducing available cargo space and increasing freight rates.
A high-intensity El Niño event would reduce monsoon rains and prolong high temperatures. A hot and dry Asian summer could create a shortfall in hydroelectric power generation in the region, generating instant demand for thermal coal transported by ship.
Agricultural trade flows too will change. The decline in Australian wheat production will push Asian buyers to import grain from the America's, thereby increasing ton-mile demand for dry bulk carriers making freight rates for e.g. oilseeds, grains, meal, etc. more expensive.
Markets
Palm oil
Weather risk and demand for biofuels are supporting prices, while volatility of petroleum continues to influence the appeal of palm oil as a feedstock for biodiesel. Longer term, support comes from drought in Asia and forecasts of a strong El Niño event, which typically brings drier-than-normal weather to Southeast Asia, affecting regional agricultural production, raising concerns about crop yields and edible oil supplies in the coming months.
Furthermore, uncertainty surrounding Indonesia's export policy causes concern. The Indonesian authorities' decision to tighten export controls took effect on June 1st, and producers are now required to report their sales to the new state-owned enterprise PT Danantara Sumberdaya Indonesia (DSI). The system is still in a transition, and companies are allowed to continue their business until DSI takes over specific export activities, no earlier than September and no later than January 1st. The reform triggered a rush to export before the new rules take full effect. Malaysian exports could decline in June for the third consecutive month if importers favor Indonesian supplies. If Indonesia increases its exports while awaiting the full implementation of the new policy, competition with Malaysia will intensify, which will weigh on Malaysian exports and increase stocks in Malaysia.
However, even though the market relies primarily on Malaysian end-of-month stocks to determine price trends, it is better to look at the combined final stocks. Ultimately, whether imports come from Malaysia or Indonesia makes little difference for the global picture. The fundamental question is: who will want to invest and produce under these conditions in Indonesia? What is the risk-reward ratio? Time will tell.
Soybean oil
The soy complex dropped sharply last week on large speculative selling all across the board, with soy oil marking the largest daily decline in nearly three months and old- and new-crop soybeans each at multi-month lows.
Long liquidation was the feature and maybe the market's gotten in oversold territory but favorable weather kept bulls from buying the break. With beneficial rainfall expected in the Great Plains, the weather forecast looks favorable for crops for the entire month of June.
The first "USDA's crop progress and condition ratings" of the season, on June 1st, found overall conditions generally good, with some areas hit by drought, while other areas were excessively wet. Conditions of US soybeans were rated 66% good to excellent, 1% below a year ago, with 87% of the crop planted and 65% emerged, faster than most recent years.
There are no indications China and the US made any progress toward additional bean purchases, abnormal dryness in some areas is expected to see relief, and beans fell below key support. On meal Argentina got more competitive with a bean harvest over 90% complete.
Fundamentals have left the bulls little reason to step in now and the bean market may see more selling on rallies until new bullish news emerges or the weather shifts. Though soybean oil futures may remain more stable, as global demand for biofuels (+ in the US the tax credit for North American feedstock) is likely to provide sustained support.
In the US, crush margins continue to be a big incentive for processors to crush every bushel possible, with US biofuel demand remaining robust and continuing to support oil prices. The USDA sees total US soybean oil consumption at 13.5Mmt in 2026 and 14.8Mmt in 2027 of which usage for biofuels is expected to rise further to 55% of total US soy oil production, compared with 44% in 2025 (5.3Mmt in 2025, 6.4 in 2026 and 8.1 in 2027).
Good to keep in mind that US soy oil prices are way ($600) above Argentine export prices and not representative for global markets. But it is a supporting factor for all other oils and fats!
Rapeseed oil
In Canada, planting is behind the five-year average due to cold and wet weather, but the situation is improving. European rapeseed prices got supported by a rally in Canadian rapeseed prices, mainly due to weather conditions that are unfavorable to planting progress and crop development but also due to the interest in rapeseed oil for biodiesel production in Canada and the US, where Canadian rapeseed oil is eligible for the 45Z tax credit and where soybean oil is so expensive.
In Australia, a significant shift of wheat acreage to rapeseed was observed on account of soaring fertilizer prices. However, Abares confirmed concerns related to the likely development of El Niño in the coming months, announcing that it anticipates Australian rapeseed production at 6.2Mmt by the end of the year, a shortfall of 1.5Mmt compared to 2025, due to reduced acreage (due to dryness) and expectations of lower yields per hectare due to dryness…
EU is a net importer of rapeseed and the crop will be OK this year but problems in Canada and Australia and strong demand for rapeseed oil for biodiesel production could be the first bricks for a strong foundation for a bullish scenario. But meanwhile, temporarily, harvest pressure cannot be excluded.
Non-gm oil on nearby is very strong and old crop rapeseed oil is expected to remain firm and spill over strength into August is not excluded but generally nearby prices should ease as the new crop hits the market.
Sunflower seed oil
Security risks in the Black Sea, where commercial shipping continues despite years of war between Russia and Ukraine, continue to raise growing concerns.
Since Russia's invasion of Ukraine in February 2022, ports, merchant ships, and energy infrastructure on both sides have been repeatedly attacked. Recently, a Ukrainian "water drone" was hijacked by Russia and sent to Constanta, a major Romanian port, where it exploded. Turkey has repeatedly warned Moscow and Kyiv not to conduct military operations near its territorial waters, following attacks that damaged merchant ships and disrupted trade routes in the Black Sea.
Sunflower oil prices kept strong and could still peak before falling in the coming months with the arrival of new harvests. Plantings are nearly complete, and the market focusses on weather as a favorable growing season should considerably improve seed availability.
India and Turkey were in the market for July deliveries, while periods of low seasonal production in Russia and Ukraine continue to limit supply. Russian and Argentine exporters continue to supply markets outside the EU.
This season, EU-27 imported 940.000 mt of seed from Argentina, of which much of the oil was re-exported, compared to only 68.000 last season. In EU, oil demand is weak as most buyers are covered and the market is in balance at a high level. All hope is on the new crop.
Petroleum
"The longer the strait remains closed, the more stocks will dwindle, the greater the likelihood that we will reach a tipping point in the markets for certain commodities"
"Four months of closed Strait of Hormuz is a recipe for a "disaster" and global recession"
Russia allegedly banned the export of jet fuel after Ukrainian attacks on Russian oil refineries reached a record high in May. Sanctions imposed by the US and the EU against Russian oil companies, infrastructure, and tankers are also limiting Russian exports.
Finally, there are more and more concerns voiced about increasing disruptions to diesel and gasoline supplies, as well as shortages of petrochemicals, some lubricants for farm equipment and fertilizers. This is apparently ignored by the market, which is maybe why the price of Brent remains below $100/bbl. instead of climbing to the $150-200 range. Things that have kept prices in check, like high inventories on land and afloat, coordinated releases from strategic petroleum reserves, shoulder-season, and killed demand in Asia and Africa, have bought the market some time, not solutions! A "turning point" could be just around the corner, unless the Strait reopens soon!
∞
∞
Please reach out to your preferred AVENO contact for questions, comments and feedback.