As most automobile and homeowners are aware by now, the cost of energy is becoming a strain on the average consumer. Following the post-Katrina price pause, new historical crude oil highs occurring in April have brought this realization back home. Although recent spikes have caught our attention, crude oil has been working within a secular bull market since early 1999. As the chart illustrates, crude oil valuations have appreciated by approximately 460% in this time frame. Notable is the change in value of soybean oil, a potential energy substitute in the biodiesel/ethanol powered future. Changes in prompt month soybean oil futures in this same time frame have been nearly nominal, up 4%. The market appears to be beginning to realize this. Despite historically burdensome supplies of soybean oil, prices have not reacted to the negative fundamental picture as a base of support above 20¢ per pound forms on the chart. A move above the mid-term down trendline, occurring in May, along with sustained trade above the 50-day moving average sends the signal that the disparity between these two commodities is garnering more attention. Also notice that, as illustrated by the 100-day correlation (green study on “Next year’s crop gives clues”), crude oil and soybean oil have been moving back toward a positive correlation since early 2006. Assuming the secular bull market in crude oil is incomplete, this would suggest that soybean oil, as a fringe player, might be preparing to participate in this energies led bull market. Resistance for prompt month soybean oil is first found at 26.16¢ per pound, the 2005 high, followed by 30¢ and 35.18¢, the 2004 secondary high and high, respectively.
David P. Zimmerman is senior technical grain analyst specializing in agriculture and energy markets at R.J. O’Brien & Associates.
