Are vegetable oils such as soybean oil leading price indicators of WTI crude oil and its refined products? It might seem like an absurd question because how could a market that has 25 times the open interest in dollar terms than that of soybean oil be tracking vegetable oil prices (Figure 1).
Figure 1: Since 2020 crude oil dollar-valued open interest has averaged around 25x that of soybean oil.
Yet if one looks back even at the past year, there are some interesting patterns. On May 30, 2023, soybean oil began a 57% rally that peaked on July 24. Crude oil rallied 41% from June 24 to September 27, 2023, lagging the surge in soybean oil by one to two months. Soybean oil prices began falling sharply in August and September 2023, forerunning a decline in crude oil prices that began in late September and continued through the fall of 2024 despite the outbreak of war between Israel and Hamas.
The pattern of soybean oil leading crude oil prices didn’t begin in 2023 (Figure 2). It dates back to around 2007 when the U.S. Congress passed the Energy Independence and Security Act (EISA) which, among other provisions, required a gradual increase in renewable fuels such as ethanol and biodiesel, which can be produced from corn and soybean oil, respectively. The U.S. wasn’t alone in promoting renewable fuels. Around 65 countries have some sort of biofuel mandate, many of which were enacted between 2005 and 2015.
Figure 2: Are soybean oil prices leading indicators of crude oil prices?
In 2005 and 2006, crude oil prices rallied substantially, whereas soybean oil traded sideways. In late 2006 and 2007, crude oil prices corrected sharply. Then in 2007, as the U.S. enacted the EISA law, soybean oil prices began to soar, a rally that was followed by crude oil. Soybean oil prices peaked in January 2008 and crude oil hit its all-time high six months later in July 2008.
During the descent into the global financial crisis, soybean oil prices led crude oil on the way down, hitting bottom in December 2008, two months ahead of crude oil’s February 2009 bottom. In the 2009 price rebound, many of soybean oil’s smaller peaks and valleys occurred before similar movements in crude oil (Figure 3).
Figure 3: Soybean oil prices peaked and bottomed before crude oil in 2008
Between June 29, 2010, and February 9, 2011, soybean oil prices rallied 66% in advance of a similar 61% rally in crude oil that took place from August 24, 2010, to May 2, 2011. Soybean oil then began a long slide that anticipated crude oil’s late 2014 collapse when OPEC’s production cuts fell apart. During the ensuing bear market, soybean oil prices hit bottom in October 2015, crude oil followed in February 2016. As in 2009, the 2016 recovery in prices saw soybean oil prices hitting their local peaks and valleys before crude oil (Figure 4).
Figure 4: Soybean oil prices peaked before crude in 2010, bottomed before crude in 2015
In 2017 and early 2018, OPEC reined in production and WTI prices rallied. Soybean oil did not, however, participate in the rally. In late 2018, crude oil prices fell sharply amid high global inventories and disputes among OPEC members. Both soybean and crude oil prices fell sharply when COVID struck in 2020 but soybean oil prices hit bottom one month before crude oil and then rallied in late 2020 well ahead of WTI. Soybean oil then peaked ahead of crude oil in 2022, reaching its high in early May while crude oil peaked at the end of June. Soybean oil then led crude oil downward in late 2022 and early 2023 (Figure 5).
Figure 5: Soybean oil has been peaking & bottoming before crude oil in the 2020s as well
So, if soybean oil prices have been leading those of crude oil, the question is why? The answer may have to do with biofuels and the relative size of the two markets. Since soybean oil has found increasing use as biodiesel, its price may be hypersensitive to insipient changes in crude oil’s demand and supply dynamics.
At the center of the market are the world’s largest refining companies, which are in a better position than most to judge if there is likely to a surplus or shortage of crude oil and refined products in the near future. If they sense a potential shortfall in crude oil supplies relative to demand for refined products, they can supplement their crude oil supply with biofuels. Since the soybean market is roughly 1/25th the size of the crude oil market, it might respond by rallying in advance of a subsequent move in crude oil prices. The opposite could happen if the refining companies perceive a coming excess supply of crude oil: they could cut back on their purchases of soybean oil, whose prices might fall seemingly in anticipation of a coming decline in crude oil prices.
The relationship also appears to hold for palm oil, which is widely used as a biofuel in South East Asian nations like Indonesia, Malaysia and Vietnam (Figure 6) as well as for ultra-low sulfur diesel (formerly known as heating oil) (figures 7-9). While there is no guarantee that the apparent relationship between prices of vegetable oil and crude oil and its refined products will continue into the future, the recent softness in soybean and palm oil prices suggests that crude oil and diesel prices might struggle to rally in the near term.
Figure 6: Palm oil prices might also be a leading indicator of crude oil
Figure 7: ULSD prices might also be following soybean oil
Figure 8: ULSD prices generally followed soybean prices from 2010-16
Figure 9: ULSD prices generally followed soybean oil from 2017 onward as well
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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
