Edible oils took a breather in the New Year, what next??

The one-sided rally in edible oils that started in October 2019 is capped in the New Year. In the home markets, refine soy oil declined by almost 5% from its peak while crude palm oil is down 6%. In the global markets, Malaysian palm oil, the benchmark for domestic crude palm oil markets, posted the worst weekly decline since 2012. On the other hand, US CBOT soy oil futures too fell by around 5% from its recent peak. Most price supportive fundamental factors being already discounted, edible oil markets were due for profit booking and a few negative triggers were enough for this correction to take place.

India restricted imports of refined palm oil and palm olein earlier this month to support the domestic processing industry. This is though a positive development on the domestic front, but the benchmark Malaysian palm oil markets responded negatively to this abrupt move as the same may affect their exports to the largest destination, India. Palm oil, generally the cheapest vegetable oil, also faces competition from other edible oils. Its discount to soybean oil stands at about $25 a ton, compared with an average discount of $104 in the past year. Meanwhile, Malaysian Jan 01-15 palm oil export numbers too disappointed the markets posting just 3% rise compared to the same period last month.

CBOT soy oil futures too outgrew most agro commodities in 2019. But, the recent price fall was mainly on uncertainty over the trade one phase deal. Besides, markets are now focussing on the South American soybean crop. Weather in both the nations, Brazil and Argentina is conducive for crop development. Meanwhile, the US biodiesel BO-HO factor is at a two-year high. The BO-HO is an indicator describing the relationship between feedstock soybean oil and blendstock heating oil pricing used by the biodiesel industry to gauge costs and margins. Higher BO-HO factors discourage discretionary blending or additional blending of biodiesel above what is required by federal biofuel mandates.

Ahead, we may see corrective phase to continue in edible oils for a very short term while a bounce in the prices could be seen once again in February. The 2019 rally in the edible oil prices was backed by the widening demand-supply gap in the home as well as the global markets. We don’t see a major fundamental change in the short term. On the demand side, prices would be driven by China and India’s record imports. Indonesia plans to start on its national biodiesel B40 mandate toward the year-end. This may further reduce its exportable surplus in 2020. Supply-side fundamentals may continue to remain weak given the lower yield period of palm oil globally till February. Meanwhile, supply pressure from South American soy crop may be felt only after February. Till then we expect edible oil prices to sustain higher.

Author: Mrs.Vedika Sharad Narvekar – Research Analyst- Agro Commodities (Investment Services), 18th January 2020

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