Fats and Oils: Awaiting a fundamental improvement underpinned by crude oil support

Hot Topics Section

            My Stocks
Data Center
Market Center
Capital Flow
Simulated Trading
        

        Client

Source: Dadi Futures Research Institute

Summary of Opinions

Core Opinion: Neutral all inferences are based on the premise that crude oil maintains high prices or even rises; the price ratio of palm oil to crude oil is neutral and reasonable, and the profits from biodiesel have not actively contracted, indicating that palm oil pricing considers the fundamental weaknesses of crude oil. Therefore, if crude oil prices do not fall, palm oil has clear support. Once war factors drive a rapid destocking of fundamentals, palm oil can emerge with a more independent market.

Production Area: Neutral Malaysia’s March production is poor, consistent with previous inferences about Ramadan and holiday impacts; however, from a price perspective, there has been no sign of tight spot markets, so the overall assessment remains relatively neutral.

Demand: Neutral to bullish demand increase brought by supportive crude oil; there is a strong expectation of stockpiling in India, which may be realized after the end of Eid.

Policy: Neutral to bullish expectations of potential export controls on Malaysian palm oil, and proposals in Brazil and Southeast Asia to increase biodiesel blending.

01. Palm Oil Situation

Malaysia: Ramadan and holidays have led to expected production cuts and destocking

In March, Malaysia and Indonesia’s exports experienced a situation similar to February’s substitution and counter-substitution, with exports appearing exceptionally robust. Due to the previously mentioned Ramadan and Eid impacts, Malaysia’s March production estimates have also confirmed the earlier mentioned production cut expectations. With a production expectation of around 1.2 million tons and an export expectation of about 1.45 million tons, it is estimated that Malaysia could quickly destock to 2.1 million tons in March, very close to the neutral inventory levels of previous years.

As palm oil enters the production increase season starting in April, if the potential for production cannot be disproved, Malaysia will still face continuous inventory accumulation from April to June. Currently, the rapid improvement in Malaysia’s inventory structure has little correlation with crude oil, and the so-called biodiesel impact has not shown significant data performance. If Indonesia can quickly increase demand in the short term and continue to form substitutions in exports, it can effectively alleviate inventory pressure.

Indonesia & Malaysia: Prices have not reflected Indonesia’s urgency

From the price trends at the production areas as well as the movements in price differences and basis, the rise in palm oil prices is actually a central increase corresponding to the rise in crude oil prices; the basis trends in both regions have not reflected the spot market, and even Indonesia, which has many themes, has not shown any strength in the price differences between Indonesia and Malaysia. Whether it is the domestic CPO price difference or the external RBD quotations, Indonesia is relatively weakening.

Thus, it is not just a matter of palm oil and crude oil price ratios being neutral on the futures side; the cash market in Indonesia has also failed to realize the fundamentals under the high crude oil prices recently.

Indonesia & Malaysia: Fluctuation in near and distant month thematic trading

Continuing from the previous text, as reflected in the cash market situation, Indonesia currently urgently needs to resolve high-priced diesel, yet despite the profits already provided by biodiesel, and the extremely low inventory levels adjusted by GAKPI data, we have not seen strength in the cash market or a recovery towards high profits. From the feedback on the production area, the supply of biodiesel in Indonesia is limited by policy constraints, although directly adding palm oil to diesel engines is somewhat special. The methanol issue seems not to be a concern; in extreme cases, neighboring countries can conduct trade substitutions.

Thus, the trend of palm oil under the current crude oil price expectations becomes quite strange, with some medium-term expectations such as the Indonesian government’s continuous intervention to reduce fertilizer use, lower planting inputs, El Niño, and even biodiesel starting to become supports for long contracts. This results in significant divergence in the current market regarding the monthly difference trend of palm oil.

02. Canola and Soy Products

Canada: Oversupply has not been resolved by war and policy

Canadian canola prices benefit from the dual influence of U.S. soybean oil and crude oil; however, correspondingly, international canola and domestic canola oil are relatively the lowest impacted by this war in the short term. Similar to palm oil, after the overall price increase, the fundamentals of Canadian canola remain weak. Cumulative deliveries from the production areas have decreased by over 600,000 tons, while cumulative consumption has increased by 230,000 tons. Considering the increase in new crops and the current export lagging behind, the narrative of oversupply in international canola is bound to transmit to the domestic market.

In the short term, due to the transgenic issues in Russia and Kazakhstan, canola oil may still maintain strength under low inventory. However, in the medium to long term, it is inevitable that canola oil will drop from May to September, with basis weakening.

Global: International canola selling pressure remains

Although the European region is heavily affected by energy issues, from the perspectives of canola oil, canola seed prices, and biodiesel policies, there is currently no expectation of demand increase for international canola oil. If paired with their new policies and the long-term maintenance of high crude oil prices, it could instead be beneficial for waste oil prices and demand.

Moreover, from the perspective of international canola, Australian canola seed prices have not been affected this time, and the price difference with Canadian canola has remained stable at $40-52, corresponding to very high domestic crushing profits. The only point to note is that in previous years, fertilizers accounted for over 40% of the planting costs for Canadian canola. If this year the rising fertilizer prices affect the planting of new Canadian canola crops, then the long-term canola oil prices will need to be reassessed.

U.S. Soybean Oil: Policy trading has become excessive; U.S. soybean oil is only driven by diesel

According to information from external consulting agencies, the recent price of D4 RIN in the U.S. has undergone drastic adjustments. The theoretical price of D4 plunged from 1.45 to 1.01 within two weeks. There is a significant divergence between the theoretical price and market price; the market price of D4 has only dropped from 1.61 to 1.52. This divergence indicates that D4 RIN is under further downward pressure, posing potential bearish implications for U.S. biodiesel profits and soybean oil demand.

From the perspective of the price difference between U.S. and South American soybean oil in the international market, the bullish factors for U.S. soybean oil have been fully traded, especially regarding policy trades. As mentioned in the previous text, the U.S. has had extreme trading regarding biodiesel RINs, leading to an inability to provide more expected demand for RINs before policy implementation, let alone substantial demand that has yet to materialize.

03. Demand

India: Recent significant decrease in port inventory, obvious stockpiling demand

India’s imports have been greatly affected by the war, with sunflower oil imports interrupted due to logistics issues. Recent data from Indian ports show that by mid-March, India’s total oil inventory at ports has significantly decreased by nearly 20% compared to the end of February, with declines ranging from 16% to 30% for soybean, sunflower, and crude palm oil.

If India’s current situation is due to high oil prices and the Ramadan issues in the production areas, or the previously circulated rumors of insufficient natural gas in India leading to reduced oil consumption, these factors will lead to a clear stockpiling demand in Indonesia once normalcy is restored. Corresponding price pressures will arise in April as production increases, and India’s demand may quickly erase this expected price gap.

SEA, Dadi Futures Research Institute

China: Waiting for inventory structure to change

Xu Chao

Practitioner Qualification Certificate No.: F03113143

Investment Consulting No.: Z0021824

 Sina Cooperative Large Platform Futures Account Opening Safe, Fast and Reliable

Massive information and precise interpretation, all in Sina Finance APP

Editor: Li Tiemin