Money and Petroleum

Following Trump's victory, markets focus on the potential for higher US interest rates and a stronger US dollar, against a backdrop of declining global trade volumes, leading to a challenging economic environment and more global macroeconomic uncertainty. And while the weak economic outlook in the eurozone is likely to lead to further rate cuts to support the economy, the US economy seems in better shape and expected inflationary policies of the Trump administration may prevent the FED from lowering interest rates (?). The interest rate differential is working in favor of the US dollar. There are also calls in the US for a weaker dollar to reduce the trade deficit, but increased import tariffs by the new administration may also help achieve that. Imports into EU are likely to become more expensive due to exchange rates; exports may improve.

Geopolitical risks added a war premium and pushed petroleum prices back up this week, recovering much of the November losses. The market will likely refocus on supply and demand fundamentals in a largely weak economic environment towards the end of the month and with the next OPEC+ meeting in early December approaching. An escalation in the Russia-Ukraine war puts at risk the Russian energy infrastructure, a situation also supportive to EU natural gas futures.

Markets

PALM OIL

A weak soybean complex and concerns about demand weighed on the market and drove prices down. Profit taking by speculators is also not excluded. Palm oil futures saw a big correction and seemingly palm had not enough strength on its own to hold ground.

In anticipation of a tighter global supply, buyers have been looking to secure some oil and increased their purchases to secure and stabilize their domestic stocks. India has been quite active. But high palm oil prices also chased buyers away. In Indonesia, data from the Indonesian Palm Oil Association GAPKI showed that September end of month stocks increased 23%, from the month earlier following a deep fall in exports. Also, Malaysia has been reporting some disappointing export data.

Palm prices may stay highly volatile, torn between concerns over subdued demand due to high prices and a supply tightness in producing countries on top of a poor global sunflower and rapeseed supply.

In the background there is talk of Indonesia delaying its biodiesel policy change (from B35 to B40) or only implementing it gradually. And talk about the economic (non)sense with gasoil prices way below crude palm oil prices. Considering that the coming months are a seasonally low-production period and with Ramadhan in March, the palm oil supply will remain extremely tight in the first quarter of ’25. So, to B40 or not to B40 is the question with the potential of “a trump card” (a surprise decisive overriding factor or final resource).

Soybean oil

The bean complex has been trending lower on rather mild weather in South America which increases the chances for good harvests. The Brazilian crop is expected to set a new record this season and the Associação Brasileira das Indústrias de Óleos Vegetais (ABIOVE) expects a crop of about 168Mmt vs. 153 last year, the USDA is predicting 169Mmt of soybeans and someone even shouted 170! Argentina, Paraguay, Urugay… all look promising too. But all planting is not yet behind us and we have a long way to go before the crops come off the field.

Last Friday in Chicago, January 25 soybean OIL futures closed down at $0.4184/lbs., January 25 soy BEAN futures closed below $10.00 at only $9.83/bu., and gone were most gains of the past two weeks!

Soybeans had benefitted support from strength in other vegetable oil markets but that has given way and so have bean prices. Other factors, besides a lack of bullish news, were technical selling, China and Brazil signing a new trade deal last week and the higher dollar which is bearish for all agricultural exports as it makes “dollar commodities” more expensive.

Also playing in the back of people’s mind is what will happen with the imports of UCO (used cooking oil) from China and Brazil and what are the long-term demand prospects for soybean oil for biodiesel production in the US? This uncertainty will weigh till fully cleared.

Rapeseed oil

Rapeseed futures in EU corrected quite a bit, breaking their ascension that had been in place since September. Last Friday the February 25 position settled at €508.75/mt giving up all previously acquired gains this month. But with global rapeseed production well below last season's levels due to large production declines in Canada, Australia and EU, rationing of demand during this season will be inevitable.

Without imports there is not enough seed in EU to finish the season at the processing pace we have seen in the first months of this season. So, EU already ramped up its seed imports which have been much higher than last year in the same period.

All in all, rapeseed prices find support from limited supply, despite pressure on the international oilseed complex. In Canada, rapeseed prices too lost some ground despite a national supply that ended up being less generous than expected and the record pace of exports. Since August, Canada exported 3.4Mmt, double the volume recorded during the same period last year. Rape oil demand for biodiesel production in the US is also a question mark. The arrival of Australian seed on the market offers new opportunities as we move into 2025!

EU rapeseed oil followed the drop in EU rapeseed futures and weakness in other edible oils.

Sunflower seed oil

Uncertainties and nervousness continue to hang over the market due to escalating war tensions in the Black Sea region (risk of disrupted trade flows), the tighter sunflower seed supply, deteriorating crush margins and a slowdown in crush activity which slows down the oil supply.

Globally, high prices have led to demand rationing and a shift to the more attractive soybean oil. After soaring way above $1,300/mt about two weeks ago, the crude sunflower oil market cooled considerably on recent weakness in soybean and palm oil. A slight increase in farmer sales of seed before December, a month in which generally all activities unwind/decline, also helped.

Cheaper soybean oil is likely to cap the price of sun oil on the global market, and we have already seen countries move in style from sun to soy, but in EU we may see that a shrinking supply of rapeseed oil could create a shift to sun. While one would have thought earlier more of a switch from sun to rape because of price. Interesting times.

Olive oil

After a difficult two years, this season’s olive harvest looks much better. The Spanish Ministry of Agriculture expects a 48% better harvest compared to last year. This positive outlook is shared by the International Olive Oil Council, which anticipates improved harvests in Greece, Portugal, and Tunisia. Spain, the world's largest olive oil producer, is expected to produce around 1.4Mmt vs. 850.000 mt in the previous season. A record olive oil production above 450.000 mt is also expected in Turkey. The Turkish Olive Oil Council even eyes 500.000 mt! However, in Italy, the Istituto di Servizi per il Mercato Agricolo Alimentare (ISMEA) envisions olive oil production about a third less than last year or only about 220,000 mt. Nevertheless, global olive oil production is seen recovering, from 2.7Mmt last season, to 3.5Mmt. High-quality oils may still experience quite some price volatility, but with favorable weather conditions, prices should ease with the start of new harvests and the increase in supply. Lower prices will prompt more demand but prices are expected to gradually normalize and stabilize throughout 2025.

Biofuels

A number of countries around the world have or are in the process of introducing, mandates or tax incentives to decarbonize aviation. In EU, a Sustainable Aviation Fuel (SAF) mandate that comes into force in 2025 requires, that jet-fuel taken onboard at EU airports, progressively, by yearly increases, contains at least 20% SAF by 2035 and 70% by 2050. Recently DHL Express and Shell signed an agreement under which Shell is to deliver 25,000 mt of SAF, for one year, by pipeline to Brussels airport. This SAF, produced in a fossil oil refinery by co-processing renewable feedstocks with petroleum, reduces GHG emissions compared to 100% fossil jet-fuel.

Stellantis (Abarth, Alfa Romeo, Chrysler, Citroën, Dodge, DS Automobiles, Fiat, Jeep®, Lancia, Maserati, Opel, Peugeot, Ram Trucks, Vauxhall) recently announced its full range of diesel cars and light commercial vehicles are fully compatible with Hydrotreated Vegetable Oil (HVO) Diesel fuel, an alternative to fossil diesel. The fuel has also been validated for use in many existing Stellantis vehicles with Euro 5 and Euro 6 diesel engines.

In the US, separate from federal law, many states have laws and incentives related to the use of biofuels; California is the biggest biodiesel consumer followed by Texas!

Earlier this month, in a reaffirmation of its commitment to tackle climate change, particularly in light of potential changes in federal policy, the California Air Resources Board (CARB) voted amendments to the state's Low Carbon Fuel Standard (LCFS) adopted in 2009.

The LCFS requires fuel producers to purchase tradable credits if their products exceed a defined baseline for carbon emissions. This policy change also aims to increase the price of tradable credits and the board acknowledges the change will likely lead to higher fuel costs.

In the last 15 years, California has used increasingly more biodiesel to reduce emissions and currently, 75% of the state's diesel pool is renewable. The CARB aims to reduce the carbon intensity of transportation fuels by 30% by 2030 and 90% by 2045. And by raising carbon intensity reduction targets it aims to increase the production of low-carbon fuels. Supportive to rural America is that crop-based renewable fuels are also recognized as a long-term solution.

In Thailand the Ministry of Energy announced it would reduce the “palm oil-based biodiesel” content in diesel fuel at the pump from 7 to 5%, as the recent surge in crude palm oil prices had pushed the retail price of biodiesel to too high levels compared to fossil diesel.

In Germany, a glut of cheap “GHG Tickets” has led the government to freeze excess “greenhouse gas or CO2 certificates” for two years, meaning obligated parties will have to start from zero in 2025 which will encourage the physical blending of biodiesel. It prevents companies from carrying over their GHG emission certificates to 2025 and 2026; companies will be required to use certificates produced in the same year, rather than over-complying and storing credits and carrying them over to the next year. For the rest of 2024, there is little incentive to physically blend biodiesel in Germany as it is more profitable to use as many “tickets” as possible while still valid. The biodiesel margin took a considerable blow as a result, short term this is bearish for rapeseed but could turn bullish in early ‘25.

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