The soybean oil market has grown increasingly vulnerable to a round of noncommercial long liquidation based on this group increasing its record large net-long futures position.
Fundamentally, soybean oil remains bullish, as indicated by the backwardation of its forward curve.
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As I talked about in a post on LinkedIn Tuesday (May 5), soybean oil has become one of the key markets in the commodity complex of late. Just as Sugar (Softs sector) has shown renewed life due to its connect to gasoline via Brazilian ethanol production (Brazil is the world’s largest sugar producer), soybean oil has been linked to the skyrocketing diesel fuel (distillates, heating oil, etc.) market. A quick check shows the US holding second place in the world for bean oil production, trailing China but leading Brazil. As for soybean oil exports, Argentina leads the pack, and it isn’t even close. (Think Secretariat at the 1973 Belmont Stakes.)
Recall from previous discussions, one of the ways I track markets is based on a Tuesday-to-Tuesday positioning week schedule given the Commodity Futures Trading Commission pulls data for their weekly round of Commitments of Traders reports following Tuesday’s close. Why? I’ve argued for decades (usually to deaf ears) that the trend (price direction over time) is driven in large part by the flow of noncommercial money into and out of the FUTURES market (No, not futures AND options. I’ve talked about that before as well, also to an unbelieving audience.)
Given this, we can make an assumption on fund activity based on the price change we see from Tuesday to Tuesday. For example, this past positioning week saw the July soybean oil (ZLN26) contract gain 4.39 cents. The previous week, from April 21 to April 28, the July issue added 0.85 cent. When the Commitments of Traders report (legacy, futures only) was released Friday afternoon (May 1), the noncommercial net-long futures position had increased by 2,731 contracts, coming in at 171,812 contracts. Analysis of last week’s numbers brought two key points to the surface:
- This was a new record large noncommercial net-long futures position for soybean oil
- The change included a decrease in long futures of 2,764 contracts and a decrease in short futures of 5,495 contracts
What does this tell us?
- The record large noncommercial net-long futures position increased the market’s vulnerability to a long-liquidation selloff
- The fact the previous week’s change was driven by short covering was not as bullish as a change led by new buying interest
Which puts the spotlight back on this past week’s activity and the 4.39 cents positioning week gain. Recently, the long futures position had grown to a record large 224,348 contracts (Tuesday, April 21), leaving a lot of room for liquidation IF diesel fuel broke down.
Ah yes, the diesel fuel connection. Keeping in mind the old saying “correlation does not prove causation”, the one-month correlation between the distillates futures (HO) and soybean oil (ZL) is 92.8%. (The one-month correlation between sugar and RBOB gasoline is 82.5%.) At this time when markets are driven more by day-to-day headlines (predictable chaos) than fundamentals, the strong correlation between diesel fuel and soybean oil could add fuel to the noncommercial long liquidation fire. All while fundamentals remain bullish for both markets, as indicated by backwardated (inverted) forward curves.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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