Crude oil and vegetable oil markets
Presentation prepared for Oils & Fats International,
June 2020 Webinar
By James Fry, LMC, UK
[Link]
Topics I will introduce today
Petroleum is a key to an understanding of the vegetable oil market today.
Not only does it determine the price range within which the vegetable oils
trade (the “price band”), but it is also a signal about the state of the world
economy. Therefore I will start with a review of the situation in the
petroleum market, focusing on the US.
This leads neatly into the behaviour of vegetable oil prices inside the price
band. I usually talk about the price band in terms of vegetable oil prices and
Brent crude, but we must not forget that biodiesel actually competes with
diesel, not crude oil and so I will introduce some discussion of diesel prices.
Among the oils, the soft oils do not have to be produced every day, if
demand is absent, since seeds can be stored. Palm is different; it must be
processed straight after harvesting and so palm oil stocks are an excellent
barometer of the state of the excess supply or demand for oils as a whole.
Although COVID-19 has cut the output of vegetable oils, demand has been
hit more heavily in the lockdown. I will end by indicating how we see their
interaction affecting palm oil stocks and therefore also vegetable oil prices.
© 2020 LMC International. All rights reserved. Crude oil and vegetable oil markets – OFI 9th June 2020 2
The demand for crude oil: the example of the US
These curves plot year-on-year changes in US demand for all these transport fuels. Jet fuel had the biggest fall,
followed by gasoline and fuel ethanol. Diesel use is also down.
This has happened globally, and has inevitably hit biodiesel sales, and thus demand for oils as feedstocks
everywhere that there is a biofuel mandate, whether in Europe, North and South America, or Asia.
Year-on-year growth in weekly US transport fuel demand in 2020
20%
Year-on-year change in US weekly fuel demand
0%
-20%
-40%
-60%
-80%
-100%
10-Jan-20 07-Feb-20 06-Mar-20 03-Apr-20 01-May-20 29-May-20
Gasoline Ethanol Diesel Jet fuel
© 2020 LMC International. All rights reserved. Crude oil and vegetable oil markets – OFI 9th June 2020 3
The supply of crude oil: the US shale sector
The slump in crude oil prices was caused by Russia and the Saudis, but the only true market-driven swing factor
is US shale oil. Its output responds rapidly to price signals. In 2018-19, at $60-70/bbl. for WTI, US shale was able
to meet the entire annual growth in world crude oil demand. Crashing prices caused shale output to follow suit.
Right now, WTI is trading at $38 (with Brent at $41). Until WTI reaches $45, US shale production will go on falling.
Annualised growth in US shale oil output vs. WTI crude
150 4
135 3
US shale annualised output growth, mn bbl/day
120 2
105 1
WTI $/barrel
90 0
75 -1
60 -2
45 -3
30 -4
15 -5
0 -6
04/2008 04/2010 04/2012 04/2014 04/2016 04/2018 04/2020
WTI, $/bbl (RH axis) Shale output growth, mn bbl/day
© 2020 LMC International. All rights reserved. Crude oil and vegetable oil markets – OFI 9th June 2020 4
Turning now to vegetable oils prices
This is the vegetable oil price band, setting the range in which EU vegetable oil prices trade. Brent crude (in $ per
tonne) is the floor, and the top of the band seems to be around Brent +$525 (for CPO it is Brent + $425). We were
recently near the top of the band, which has been dragged down by the collapse in crude oil prices.
EU vegetable oil and Brent prices (and Brent +$525)
1,400
1,200
EU vegetable and crude oil prices ($/tonne)
1,000
800
600
400
200
0
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
Soybean Palm Rapeseed Sunflower Brent
© 2020 LMC International. All rights reserved. Crude oil and vegetable oil markets – OFI 9th June 2020 5
Where do daily prices stand in the price band?
The ceiling of the EU CPO price band is $425 over Brent. We see that the premium tested the ceiling but it has
fallen back. The very low CIF EU-Indonesia gap shows (a) how Indian buying pulled Indonesians prices up to EU
levels, and (b) the weakness of EU demand for all oils. Note also the low gasoil-Brent spread. This is important
because biodiesel competes with gasoil, and the Indonesian mandate subsidy is based on the gasoil-CPO spread.
CPO (EU and FOB Sumatra) & gasoil daily premia vs. Brent
500
400
Premium over Brent, $ per tonne
300
200
100
-100
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20
CIF Rotterdam Inside Indonesia Gas oil
© 2020 LMC International. All rights reserved. Crude oil and vegetable oil markets – OFI 9th June 2020 6
Competition between soft oils and palm oil
Soft oil daily spreads over CPO prices disappeared for a short while for sunflower and soybean oils at the start of
the year, but then widened as CPO demand fell and stocks started to rise due to COVID-19.
The spreads have fallen back after the run-up in CPO prices. Also, we see that sunflower has ceased to be the
cheapest soft oil; its supplies are low, with little to spare, as we wait for the next Black Sea crop to be crushed.
Daily spreads of the soft oils over CPO in Rotterdam
500
400
EU premium over CPO, US$ per tonne
300
200
100
-100
Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 Jul-19 Dec-19 May-20
Soybean Oil Rapeseed Oil Sunflower Oil
© 2020 LMC International. All rights reserved. Crude oil and vegetable oil markets – OFI 9th June 2020 7
How does this feed into stocks … and prices
The most severe immediate shock
MPOB stocks and the EU CPO premium over Brent
from COVID-19 has passed.
Output of oils has been less badly 600 3,300
affected than we initially expected.
EU CPO premium over Brent, US$ per tonne
Demand has definitely been hit by 500 3,000
lockdowns, and the loss of demand
MPOB palm oil stocks, '000 tonnes
has been more severe than the
400 2,700
loss of production.
With the wave of unprecedentedly
300 2,400
large government financial support
to troubled sectors, I fear that the
market has lost sight of the longer 200 2,100
term macro-economic shocks as
businesses struggle to regain sales. 100 1,800
Crucial for CPO prices will be what
happens to Brent crude oil, which I 0 1,500
expect to move above $45 by Q4.
The other key factor is CPO stocks,
-100 1,200
which will rise further, lowering Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 Mar-20
the premium of CPO over Brent.
EU CPO Premium over Brent Average Premium
All you need to do is to forecast
Brent, and then forecast stocks! For details of LMC’s monthly price analysis and forecasts, please contact one of our offices in the last slide
© 2020 LMC International. All rights reserved. Crude oil and vegetable oil markets – OFI 9th June 2020 8
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