By Gavin Maguire: The author is a Reuters market analyst. The opinions expressed are his own.
CHICAGO Feb 27 – Recent strength in palm oil prices due to production and export concerns in Malaysia and Indonesia have lent other edible oils support lately, and sparked widespread chatter that the entire edible oil arena may now be primed for a period of enduring strength.
But soy oil market bulls should be conservative in their price expectations. While soy oil prices may appear to be historically cheap relative to palm oil, and therefore likely to score some spillover demand from that market, they remain the most expensive widely traded edible oil available and are at one-year highs relative to canola and three-month highs versus sunflower oil. So while the turn higher in palm oil values may well be supportive for the edibles complex as a whole, it is not guaranteed that soy oil will be the sole beneficiary.
Read Also
Saskatchewan harvest lags behind
At 12 per cent complete as of Aug. 25, harvest progress in Saskatchewan was well behind the five-year average of 25 per cent finished, the provincial agriculture department reported. Rain and thunderstorms hampered harvesting in some areas of Saskatchewan.
A RISING TIDE LIFTS ALL BOATS
The price of all major edible oils gained in recent days in the wake of production concerns in Indonesia and Malaysia about the emerging palm crops in those countries.
As palm oil is the most widely produced, consumed and traded edible oil in the world, it tends to lead sentiment and price direction for the vegetable oil arena in general. And that has certainly been the case in recent days with Malaysian palm oil futures up roughly 15 percent since the start of February: canola and soybean oil futures are also up versus a week ago.
Sunflower prices have also gained lately, in sympathy with the move higher in palm values as well as due to worries about the stability of shipments and sales in Ukraine, the world’s top sunflower oil producer, amid the unfolding social and political unrest there.
But not all oil prices have rallied to the same degree, with palm oil prices rising 14 percent since the start of February, soy oil rising 10 percent, and canola actually showing a decline for the month so far despite a near 3 percent climb since the middle of the month.
Still, the overall firmer tone to vegetable oil prices lately has sparked widespread chatter that the weakening trend that had gripped these markets for the past two years or so has now finally been broken.
AS FAR AS WE GO?
While the recent broad turn higher in vegetable oil prices seems to be strong evidence that the 2012-2013 slump in oil prices is now over, the jury is still out on whether or not these markets are now primed for an enduring rally.
Global demand for all edible oils is expected to climb by 4.4 percent this year to a record 140 million metric tons as the global economy gathers steam and global populations continue to add more fats and oils to daily diets.
But oil production growth is expected to outstrip consumption growth by more than 4 million tons, resulting in a more than 16 percent climb in global oil stocks to an all-time high of 188.18 million tons.
This abundance of oil reserves is expected to remain at record levels even if this year’s palm oil output is kept flat versus a year ago rather than setting an all-time record, so it is hard to argue there is a genuine supply tightness emerging in this arena.
Rather, any availability concerns are likely to be confined to timeliness issues due to shipment and logistics threats for canola in Canada (due to an overtaxed rail system currently prioritizing a bumper wheat crop ahead of all other commodities), soy oil in Argentina (due to increased farmer hoarding of soybeans amid rampant inflation growth and currency turmoil) and sunflower oil in Ukraine (due to widespread social unease that is impacting the flow of goods in and out of that country.)
Bullish traders seem to view a downturn in palm oil shipments as likely should the dry conditions across Indonesia and Malaysia continue to impact production. But so far this year Malaysian shipments of the oil are ahead of last year’s pace so no slowdown is evident yet.
Still, the uncertainty surrounding the rhythm and scale of all oil shipments should be enough to continue to support prices going forward, if not fuel a further rally over the near term.
But with global oil inventories at record levels and soy oil prices already the world’s most expensive even after palm oil’s recent surge, soy oil bulls should perhaps rein in their price expectations and allow for the possibility that other oils may have the greater upside price room from here on out.
