It really is a small World After All!
Fundamentals
Experienced grain traders know that events outside of North America can have a significant impact on U.S. futures prices. A perfect example is what is now occurring in the Soybean complex. Tight supplies of vegetable oils worldwide have caused Malaysian Palm Oil futures prices to surge recently, as stockpiles fell to their lowest levels since July of 2007, according to a report by the Malaysian Palm Oil board released on April 10th . Palm Oil is considered a competitor to other vegetable oils such as Soybean Oil and Sunflower Oil, and fundamentals in one of these markets can influence prices in the others. In addition, Soybean stocks remain tight, as Argentina continues to see its production estimates lowered, and current U.S. ending stocks remain tight. Global Soybean production was once again lowered, with the USDA looking for the 2008-09 world Soybean production to fall to 218.76 million tons, down approximately 4 ½ million tons from its previous estimate. Demand for both Soybeans and Bean Oil remains solid, with China in the market for Soybeans and Bean Oil sales strong to both Europe and India -- with buyers in the latter speeding up purchases before an expected increase in import duties on vegetable oils by the Indian government. The bullish fundamentals have caused both Soybeans and Soybean Meal futures to trade in a backwardation. A backwardation market is one where the nearby futures trade at a premium to the more deferred months. This typically occurs in markets when near-term demand is high and supplies are tight. However, the Soybean Oil futures have not joined in the backwardation bandwagon, and prices in this market are still in a contango (nearby futures prices are lower than the more deferred months).
Trading Ideas
Traders expecting near-term vegetable oil demand to remain strong and supplies to remain tight may wish to consider investigating bull spreads in Soybean Oil futures. One possible trade might be to buy July Bean Oil futures and sell August Bean Oil futures, or perhaps buying July Bean Oil and selling the new crop December Bean Oil futures. Traders who might choose to initiate bull spreads would want to see the nearby futures prices gain on the deferred months. Traders should remember that spread trades may not be less risky than an outright position, and it is possible for one month to be trading higher and the other lower (especially in old crop/new crop spreads).
Technicals
Looking at the daily chart for July Soybean Oil futures, we notice the nearly month-long bullish move has prices approaching their highest levels of 2009. Prices are well above both the 20 and 100-day moving averages, as prices accelerated to the up-side once the 20-day MA moved above the 100-day average. This is usually deemed a bullish signal by technicians, and traders responded accordingly. The 14-day RSI has moved into overbought territory with a current reading of 72.81. The January 7th highs of 38.19 should act as resistance for the July futures, with support seen at the recent lows made on March 30th of 32.05.
Mike Zarembski, Senior Commodity Analyst
