Rising crude oil could lend support to canola values

Crude oil hitting the highest price in three years is positive for oilseed prices but it does not necessarily drive them higher because of other pricing factors, such as supply and demand as well as trade issues.

These latter factors have spurred canola to a strong premium over competing oilseeds.

Strong crude oil prices help increase the demand around the world for biodiesel made from soy, palm and canola oil.

Last week Brent crude, the international benchmark price, topped $73 a barrel for the first time since late 2014. West Texas Intermediate, the North American benchmark, topped $68.

Crude has been rising for almost a year, supported by voluntary production limits and rising demand as economies around the world pick up pace.

The latest leg up was in part sparked by reports that major producer Saudi Arabia would be happy to see Brent crude rise to $80 or even $100 a barrel.

The Saudis are the dominating partner in the Organization of Petroleum Exporting Countries, which is working with other major producers such as Russia to control production so as to reduce surplus oil inventories in developed countries.

The goal is to keep the inventories at the five-year average. In March, the surplus inventory had fallen to only 12 million barrels, down from 340 million barrels in January 2017, according to news reports.

The production limiting agreement is set to run until the end of this year and the group plans to meet in June to discuss what will happen in the future.

The Saudis are happy to see a stronger price for obvious revenue reasons but also because strong crude prices will help lift the value of its state-owned oil company Armaco, which it plans to list publicly this year or early next year. The market estimates the company could be valued at much more than $1 trillion and would generate hundreds of billions of dollars for the Saudi treasury.

Additional factors supporting crude prices are the potential for the United States to reimpose sanctions on Iran and also declining production in Venezuela.

The signs are that crude oil prices could be higher at harvest than they will be this spring.

The effect of rallying crude oil on oilseeds this year is not obvious because supply and demand, as well as trade issues, are dominating the market for the latter.

This is illustrated in the differing price trends for the commodities.

Since Jan. 1, the nearby WTI crude futures price is up more than 13 percent but the May soy oil futures contract is down almost seven percent and May soybeans are down more than five percent.

And yet the May canola futures price is up more than seven percent, even with rail transportation problems and expectations for increased seeded acreage this spring.

Canola’s strong showing against soybeans and soy oil can be attributed to a weaker loonie, at least in the first 10 weeks of the year, and hope in the trade that a threatened trade war between the United States and China and potential tariffs on American soybeans could lead China to buying more canola. Also, the late spring preventing the start of seeding has supported canola values.

Canola is clearly the best performer in the oilseed complex and I wonder how long it can outperform.

The soybean market is contending with the threatened tariff issue and with new supplies from the crop being harvested in South America. Also, Argentina’s crop is much reduced by drought and Brazil looks to set a new production record.

Palm oil prices are weighed down by rising production in Indonesia and Malaysia, India’s tariffs on imported palm oil and efforts in Europe to restrict the use of palm except from sustainable operations.

There is the potential for a sharp pull back in canola prices once temperatures warm and also if the trade tensions between China and the U.S. continue to wane.

But if crude oil prices do march to $80, we could see more vegetable oils going into biofuel in the coming crop year, providing good support for veg oil prices, canola’s crush margin and, by extension, to canola seed values.

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