Soybean Oil Fundamental & Technical Analysis

This afternoon, the USDA will release the monthly Oilseeds Crushings report, providing data for the month of June. The average trade estimate of U.S. soybean crush in June is 175.5 million bushels (173.5 to 177.0 million range of ideas) vs 189.3 million in May and reflecting expectations for a minor increase from last year’s June crush of 174.1 million bushels. NOPA-member crush in June of 165.0 million bushels was essentially unchanged from last year’s 164.7 million. The average estimate of end June U.S. soybean oil stocks is 2.207 billion pounds (2.175 to 2.245 billion range) vs 2.386 billion in May and 2.316 billion last year June, while being the lowest in 7 months as is common with soybean oil stocks typically seasonally declining during the mid-portion of the year. The average trade estimate reflects nationwide soybean oil stocks 30.6% above NOPA-member stocks vs the previous three months’ average difference between the two of 28.7%.?

Let’s see what the technicals say.?Our forecast (most probable path for prices given current information is for soybean oil prices to move lower.??

The rally off the low beginning June 1 has occurred in 3 waves where wave A of b = wave C of b (very common for corrections).?There is also minor divergence between price and momentum, signaling a potential reversal.?The future is always a set of possibilities with assigned probabilities.??Currently, the probability shifts to lower prices.?If we see 5 waves develop to the downside (as shown in next chart below), the probability that prices will test the low of 45￠ increases.?If price makes a new high above 65￠, that would be time to reduce short risk and the interpretation will need to be redrawn.???

Adding support for a lower price forecast is the seasonality.?Here is a chart of the 30-year seasonal for soybean oil.??

You can see this market typically (not always) will top in late April/early May and move lower until October.?

For other potential clues, we can look at WTI Crude Oil.?You can see the correlation below.??

You can see soybean oil has outperformed crude oil since their respective recent bottoms.?As the college professors like to say, “ceteris paribus”, if this spread reverts to its mean, we should see soybean oil prices fall relative to crude oil.?Although I am not sure I would take a college professor’s advice on anything these days, especially commodity trading.??

Recent fundamental news is recapped here:??

(Bullish) EIA reports record amount of SBO used for biodiesel in May

(Bullish) EU oilseed crop ideas lowered to 19.3 MMT from 19.8 by Strategie Grains

(Bullish) USDA reports new crop soybean sales of 501,000 tons to unknown destinations.

(Bullish) Indian veg oil imports hit record high in July

(Bullish) NOPA end June soybean oil stocks sharply lower than expected

The news appears to be very bullish.?Of course, news often follows price (not the conventional thought that price follows news).?This is why commodity markets confuse most of the people most of the time.?

In the coming weeks, we will see if the fundamentals or technical win out and what other new drivers may come surprise market participants.?Regardless of your opinion and outlook, you should have a plan.?

Looking at December soybean oil futures, procurement specialists should feel comfortable adding some coverage at 55￠/lb (a 50% retracement of the rally) with the longer-term target below 46￠.?The “stop-loss” level or plan B is 66￠ in December.?With December futures currently above 60￠, by waiting, you are risking 6￠ to make 14￠, a pretty good risk:reward ratio.??