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Bean Oil Steady, as Beans Become Attractive

David Becker
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Bean oil prices moved higher through the prior week as supplies of beans became an issue which drove the entire bean complex. Despite a deep contango term structure, hedge funds reduced short positions in bean oil and added substantially to long position in soy beans which helped drive the bean complex higher.

Bean supplies could generate increasing prices for bean oil despite a term structure that reflect a deep contango. Currently the March 2014 versus May 2013 soy bean oil spread is currency 33 pips in May’s favor which at current storage and interest rates, puts bean oil in full carry. This means that commercials can purchase bean oil, store it and finance the position and generate a profitable arbitrage.

The bean complex could benefit from a potential lack of supply. According to the U.S. Department of Agriculture forecasts ahead of the fall harvest, U.S. soybean stockpiles will be 35% below the five-decade average, due partly to rising consumption in China, the world’s biggest buyer of soybeans.

Hedge funds have been turning around their short positions in bean oil and increasing their long positions in beans. According to the latest report from the CFTC, hedge funds added 24K contracts to long bean position while reducing short positions by 5K. Hedge funds also reduced their short bean oil positions by 12K contracts according to the latest commitment of traders report released for the date ending 2/12/14.

Bean oil prices climbed more than 4% in February. Momentum as reflected by the MACD is strong and the index generated a buy signal in early February. The trajectory of the MACD is pointing to higher price action as it generates its highest reading in the past 5-months. The RSI nearly hit the overbought trigger level of 70, and turned downward Friday after price action attempted to breach a long term trend line that connect the highs in May of 2013 to the highs in November.

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