Fading the Soybean Oil premium
Jumping straight into the technicals, we see a head and shoulder pattern on the daily Soybean Oil chart. With the neckline now broken, it seems a bearish set-up might be possible.
While the technicals are important, understanding where the current price level of soybean oil is in context to other products could help us build further conviction on this idea.
Firstly, the Soybean crush components. Currently, Soybean Oil trades at a pretty large premium against Soybean and Soybean Meal. From the bottom in 2020 to current levels, Soybean Oil has risen roughly 138% compared to 78% for Soybean Meal and 83% for Soybean. Looking at the price ratios of Soybean Oil/Soybean & Soybean Oil/Soybean Meal, we also see that both have been trading out of the ‘normal’ range since 2021. With both ratios now trending lower and knocking on the door of the normal range again, we will watch closely to see what happens as we approach this critical juncture.
Secondly, Soybean Oil vs its substitute, Crude Palm Oil. Again, we see Soybean Oil as the outlier here, as it outpaces Crude Palm Oil’s recovery by roughly 44% when measured from the bottom in 2020 to current levels. Looking at the bottom chart, we can clearly see the Soybean Oil/Crude Palm Oil ratio deviating from the average range established in 2018 – 2021. With this ratio recently trending lower, a break below the upper level of the range established (dotted line) could accelerate the closing of this premium, as seen in the 2021 to 2022 period, where the ratio collapsed swiftly.
The technically bearish setup, coupled with Soybean Oil’s relative valuation against the soybean complex and Crude Palm Oil on fundamental standpoint, makes a decent case to short Soybean Oil Futures from here.
To express this view, we can consider setting up the trade in a few ways:
1) An outright short on Soybean Oil using the CME Soybean Oil Futures, at the current level of 60.21, setting our stop at 67 and taking profit at 42, with each 1-point move in the Soybean Oil Futures contract equal to 600 USD.
2) A spread trade between Soybean Oil & Crude Palm Oil, by taking a short position in the CME Soybean Oil Futures contract and a long position in the CME Crude Palm Oil futures contract. Such a setup could potentially allow you to stay profitable even if you turn out to be ‘wrong’ in your market views if it eventually proves that crude palm oil has been underpriced and the soybean premium is closed by crude palm oil rallying. For this trade, it is trickier to set up due to the contract size and tick value difference.
The charts above were generated using CME’s Real-Time data available on TrendSpider. Inspirante Trading Solutions is subscribed to both TrendSpider Elite and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out CME Group data plans available that suit your trading needs.
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Reference:
https://www.cmegroup.com/markets/agriculture/oilseeds/soybean-oil.contractSpecs.html