Commentary
Last week saw a major squeeze on the oil share shorts that was launched early Friday morning as it was reported that Indonesia, the largest palm oil producer and exporter in the world, was halting its oil exports as of April 28th to control domestic oil costs. However over the weekend, Indonesian government officials told palm oil companies that an export ban announced late last week would only cover shipments of refined, bleached, deodorized RBD palm oil but not crude palm oil, per Reuters. That had the bean oil market reversing trend, but by today’s close Bean Oil finished well off its lows for the day. Aiding the bounce in my view is that USDA reported daily soybean sales of 330,000 MT for delivery to China, 66,000 MT for delivery during the 2021-22 marketing year and 264,000 MT for delivery during the 2022-23 marketing year. Another 204,000 MT of soybean sales were reported during the reporting period to China for 2022-23. Today’s sale marked China’s first USDA-reported daily purchases since April 15th. Despite additional Chinese cities entering into further covid lock-downs such as Beijing, which could increase potential for softer soybean demand, the massive purchases out of China for US Ag products in the last week tells another story. Despite the reversal from the Indonesian gov’t regarding palm oil, the world’s veg oil balance sheet is delicate at best in my opinion. The debate is not whether there are enough oil seeds in the future, but whether the crush of the oil seeds will not drag down profitability of the crushers who seek to sell oil at historically exorbitant prices. Eighty percent of the bean crush is for soymeal. Therefore it should be 50 percent of the profitability. Crushing for oil is not what this industry is built for, and given increased bio-fuel mandates, demand has continued to outpace supply. It is a major reason why we sit at all time highs here. I’m looking at a trade on the back end of the curve here. We have a severely backward dated bean oil market, as prices are significantly lower farther out on the calendar. That doesn’t necessarily mean we are heading lower in the deferred contracts. Trade Idea below using a Xmas tree option strategy below.
Trade Ideas
Futures-N/A
Options-Buy the Dec Bean Oil 80 call. Sell the Dec Bean Oil 87 call and a Dec Bean Oil 94 call at -20 ZLZ22C8000:8700:9400[XT]
Risk/Reward
Futures-N/A
Options-One is collecting 20 points or $120.00 minus all commissions and fees upon entry. There is unlimited risk here as one is short an extra call. My goal here is to collect upon entry and exit. I’m looking for the trade to potentially hit trade up to the high 80s, especially if we have a a weather market this Summer. Should we never rally and December Bean Oil never trades above 80, then we just keep the collection. If one is filled at negative 20 points, look to put at sell stop at -80 points risking 60 points or $360 plus all commissions and fees.
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