Fund Soyoil Bets Could Fizzle Without More Bullish News

oil

(Reuters) – A tightening in global vegetable oil supply did not go unnoticed by market participants last week as bullishness in the overall Chicago Board of Trade soybean complex – led by soybean oil – built to a four-month high in the week ending Nov. 1.

Hedge funds and other money managers extended their net long positions in CBOT soybean oil futures and options last week to the largest volume in more than 10 years, according to data from the Commodity Futures Trading Commission.

Outright long positions in the soyoil market also hit a record at 136,973 contracts, topping the 133,220 positions from the first week of April 2016.

But in order for the long bets to generate hearty profits for investors, soyoil futures – along with soybeans and soymeal – will be under pressure to perform in a high-supply global environment.

Nearby December soyoil futures have been relatively choppy since hitting a two-year high of $0.362 a pound on Oct. 25, but the trajectory has been mostly downward.

Funds and money managers are slowly turning optimistic again on CBOT soybeans as their net long position of 110,613 contracts is the largest in over two months, but soybean meal is unconvincing as the funds’ longer net position owes to short covering rather than a solid build-up of new longs.

CAN SUPPORT CONTINUE?

Global vegetable oils have been supported in recent weeks by production concerns for palm oil, soyoil’s key competitor. Periodic weakening in the Malaysian ringgit has also supported palm oil futures, but strengthening has been the overall trend since mid-year.

In the soybean arena, traders are weighing continued heavy demand for the U.S. product against the enormous domestic harvest, which may get even bigger on Wednesday when the U.S. Department of Agriculture updates its monthly crop estimates.

Add into the mix the great start to the South American soybean growing season – but the potential for La Niña-related weather concerns in the coming months – and the soybean market is even less sure of itself.

But the soy products are going to need some help from the fundamentals. Without triggers such as emerging hurdles for South American soybean growers, a lighter U.S. yield number from USDA on Wednesday, or confirmed reductions in palm oil output in Southeast Asia, the huge soyoil long position built up by the funds may not be that indicative of things to come.

Looking back to the beginning of April, the last time that funds mounted such a large long position in soyoil, front-month futures did not move too much higher in the weeks after and ultimately lost about 15 percent before bottoming out on July 28.

Unsurprisingly, a soyoil sell-off ensued among funds and money managers, who spent three weeks on the short side of the market at the end of July before quickly restoring confidence in the vegoil by late August.

But today, funds are roughly 100,000 contracts longer than at the beginning of April in the soy complex as a whole, implying that genuinely bullish news will be needed for futures prices to sustain or move higher in the likely absence of a meaningful short-covering rally.

Additionally, the soy complex received a huge boost from soymeal back in April, when not only were funds short soymeal to begin with – as opposed to modestly long today – but the talk of significant meal shortages out of Argentina helped boost CBOT soymeal futures to near two-year highs in early June.

This week, the oilseed and vegoil market will be watching for USDA’s supply and demand reports out at noon EST on Wednesday, October palm oil production numbers from industry regulator Malaysian Palm Oil Board on Thursday, and movement in the dollar pending the outcome of Tuesday’s U.S. presidential election.