Just when we thought that the fundamentals were back in the picture yesterday demonstrated that crude oil still has some directional force in the vegetable oil commodities market.
Since the first of the year we have seen roughly a 500 point drop in the soybean oil market. On January 21, 2010 the Wall Street Journal (WSJ) published an article “China Worry Slams Commodities”, Tom Sellen.
China's latest efforts to rein in economic growth sparked concerns about demand for commodities, hurting copper, gold and cotton, among others. Commodities futures were down almost across the board Wednesday as China's latest efforts to rein in economic growth sparked concerns about demand. Investors were fleeing commodities for the safety of the U.S. dollar as the Bank of China ordered its credit officials to stop making new yuan-denominated loans. The news, coming after other recent measures in China, heightened concerns that interest-rate increases could happen sooner than expected. Market participants fear a tighter monetary policy in China could thwart a global economic recovery, and thus stifle demand for commodities ranging from copper and crude oil to corn and soybeans. Demand from China has been instrumental in supporting many commodities. […] In the energy markets, light, sweet crude oil for February delivery fell 1.4% to settle at $77.62 a barrel. The surge in Chinese oil demand in recent years was one of the factors that drove oil prices to their peak of $147 a barrel in 2008. Falling commodity prices also were being seen in the Chicago grain markets. Among contracts for March delivery on the Chicago Board of Trade, corn lost 0.3% to settle at $3.68 a bushel. Wheat was 0.6% lower at $4.9750 and soybeans shed 1.4% to settle at $9.50 a bushel.
Then on January 28, 2010 the Wall Street Journal (WSJ) published an article “Traders Bet on an Oil Breakout”, Carolyn Cui.
After the quietest trading period in more than two years, traders are starting to bet crude oil will wake from its slumber. Since October, prices have largely ranged from $70 to $80 a barrel, the narrowest four-month band since mid-2007. An oil "fear gauge"—the CBOE Crude Oil Volatility Index—early last week fell to the lowest level in more than two years. But in the past few sessions, trading in the crude-oil options market has shown signs of reviving, awakened by worries that China is putting the brakes on growth and concerns about political turmoil in Washington. While oil prices remain within that trading band, the volatility index has bounced off the bottom, according to some traders. At the New York Mercantile Exchange, daily crude-oil option trading volume rose more than 150,000 lots on Thursday and Friday, up nearly 50% from the 2009 daily average. To traders, it is a sign prices may soon be on the move. "We are getting to the point where things are coiled so much and it's going to break out," said Michael Korn, president of Skokie Energy Corp., a Princeton, N.J., brokerage firm. Southwest Airlines, Newfield Exploration Co. and Chesapeake Energy Co. all recently said they have increased their hedging positions to protect against price swings. Jeff Grossman at BRG Brokerage in New York said his firm saw increased buying of put options late last week, or options that give an owner the right to sell at a certain price, as investors tried to protect against a further downward move for oil. New swings, either up or down, likely will be triggered by expected changes in supply or demand. Some expect oil prices to tumble, taking a cue from last week's selloff in stocks, which fell on fears of another downturn in the global economy. Others say prices will soar because of stronger economic growth and fuel consumption. On Monday, Morgan Stanley in a research note predicted oil would reach $95 a barrel by year's end. On Tuesday, the price of the crude-oil contract for March delivery fell 55 cents a barrel, or 0.7%, to $74.71 on Nymex. The recent calm is in contrast to the wild swings of the past two years. Oil jumped to more than $147 a barrel in mid-2008 from $70 a barrel earlier that year, before sinking again into the $30s. The moves stirred political debate and consumer outrage. Many pointed fingers at so-called speculators, blaming them for roiling the energy markets. While Commodity Futures Trading Commission regulators struggled to agree on ways to limit speculative trading, calm has returned to the markets. As a result, some financial traders—those who make bets on prices with no interest in the fuel itself—moved away from the energy markets. At Nymex, financial traders slashed 20% of their short positions, or bets that prices would fall, and 15% of their long bets in the fourth quarter of 2009, according to CFTC data. That contributed to a 13% decline in total outstanding contracts for crude oil. As volatility dried up, more traders moved "some of their allocations toward equities and elsewhere," says Ryan Cournover, head of energy trading at Lighthouse Financial Group, a New York investment bank and securities firm. Some returned in January to build positions for the new year. Open interest rose 4% this month but still is down 9% from the end of September. For oil companies, "the stability gives them a little bit more assurance on where the oil prices will be with a little bit of incremental hedging," says Robert Morris, a Citigroup Inc. analyst. Companies use derivatives to lock in prices for futures sales. According to Citigroup, exploration-and-production companies are 33% hedged on projected production for the next 12 months, up from 22% at the end of 2008. Still, some traders say wariness about big moves in oil is growing. "The need for hedging is completely intact," says Philippe Laraison, global head of energy trading with Société Générale. The bank is seeing a regular flow of hedgers coming into the markets. Many companies were stung by the recent boom-and-bust cycle. The market's intraday volatility is still substantial, encouraging the hedging.
Where does that leave us when predicting the future? China’s internal changes will slow down their commodity buying. Oil speculation is just that speculation. Similar stories surfaced in 2008 when oil was predicted to hit $200/barrel, lucky for us it didn’t happen but it gave a good run. Oil is currently the volatile component in vegetable oil commodity prices.