Canada Markets

The bullish biofuel news that inspired a sharp rally in soybean oil going into midsummer was met with the reality of politics getting in the way, resulting in a three-and-a-half-month pullback as the EPA still works through various sticking points. The record-long government shutdown only added to delays in progress on the subject. With the latter out of the way now and surging heating oil (ultra-low sulfur diesel) prices adding to the confidence of the bulls, it appears the rally is back on track.

As you can see by the accompanying chart, the long, drawn-out bull market correction of the past few months not only filled the gap higher on the weekly chart from mid-June but also tried on a few occasions to break support around the 50 cent/pound level. With the fundamentals too strong for that to succeed, confidence has finally built up enough to inspire a break higher with prices already trading above the October highs.

Rounding out the technical outlook, the rally completes a breakup from a saucer bottom on the continuous daily chart that's been years in the making. The summer rally was the initial breakout with the following correction not only testing support that had been resistance but relieving the overbought nature of the market at the time. With support holding and prices rallying off it decisively, the formation is complete. As a rule, the longer it takes a saucer to form, the greater the move following a breakout. In this case, that suggests a very meaningful rally.

Fundamentally speaking, the biggest demand shock impacting prices is expected to come from increased use for biofuel production. USDA confirmed in Friday's WASDE update that soybean oil used for biofuel production is set to increase 3.6 billion pounds in 2025-26 compared 2024-25 or a whopping 30%.

To achieve this, they assume 2025-26 soybean oil exports will have to fall 1.6 billion pounds from 2024-25 levels. It will now be up to the market to ensure exports do in fact fall from 2.5 billion pounds to just 900 million pounds for the year to come. As mentioned previously, a repeat of the record-setting discount to palm oil that spurred on the increase in 2024-25 exports (from an initial estimate of 600 million pounds to the current estimate of 2.5 billion pounds) cannot be allowed to happen again.

Over the past month, a pullback in palm oil prices allowed the soybean oil premium to palm oil to recover from a fall decline. It is currently about $150/mt USD after marking a summer high of nearly $250/mt and a fall low of only $20/mt. The latter dip did inspire some meaningful export sales just prior to the government shutdown with traders eager to see what has happened since.

It's also worth noting the strength in soybean oil this week has marked a reversal in the soybean oil and meal spread. Soybean meal had a very sharp rally over the past month with it gaining over 21% in value while soybean oil barely treaded water. That is now in the process of reversing with meal pulling back during the current soybean oil rally.

Not to be overlooked, a very significant rally in heating oil or ultra-low sulfur diesel can take a lot of the credit for the recent breakout in soybean oil. The December contract has just topped $2.62/gallon after putting in a low near $2.10/gallon a month ago ahead of the Trump/Putin meeting in Alaska. The rally takes prices up to life-of-contract high levels for the December contract with the continuous chart showing resistance near this area, last seen in June.

The fundamental driver of strength in the diesel market is tight supplies thanks in part to the war. Ukraine drone attacks on Russian oil infrastructure and refineries (in particular) have impacted global supplies. At the same time, demand for heating oil is ramping up in Europe ahead of winter with suggestions circulating it is a scramble for supplies. Within the U.S., the EIA reports distillate (diesel) stocks approaching 5-year lows at 112.9 million barrels. In the big picture, if the refinery damage in Russia is a significant factor in all of this, that could be very concerning considering the time it takes to repair or replace facilities. With that in mind, it's worth noting the resistance levels facing the market (remaining as prices pulled back following the initial Russian invasion) are $3.44/gallon set in September 2023, then $4.12 and $4.51/gallon set in 2022.

Of course, all this discussion should be supportive for canola, which has broken out of its own down channel over the past month.

I welcome feedback along with any suggestions for future blogs. My daily comments can be found in Plains, Prairies Opening Comments and Plains, Prairies Quick Takes on DTN products.

Mitch Miller can be reached at mitchmiller.dtn@gmail.com

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