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Cheap spreads on soybean oil

11 Dec 2017,

Recently, many of you have been interested in my point of view on soybean oil. That is why I will focus on this market also today. Personally, as a spread trader, I can see an interesting situation here, and although not all analyses are favourable at the moment, I have opened a new position. I will explain it step by step.



Bear Spreads

Today I will not begin with technical analysis as usual, but I will start directly with the spreads. With soybean oil, there is no dilemma about the spreads that should be traded. This market creates an ideal environment for bear spreads. The reason why, can be seen from contango histogram. Notice the percentage of contango for the past 5 years. I think the result is clear – it is the frequent contango that favours the bear spreads.


Full carry analysis

Now let’s look at the development of the spread on Full Carry in the last 10 years. I chose the ZLZ18-ZLV18 spread. Except the year 2013, we can see a nice tendency to grow. But that’s not all. Note the current spread – the blue curve. Spread is now obviously cheap compared to previous years.




The situation from 2013 warns me that if the market would be strong enough, bear spread can stay in backwardation and move only sideways or even drop! The probability of this scenario is not large, but it is not zero. That’s why I’d rather count with it.

Full carry is a great thing. It shows the spread value compare to the maximum storage costs. Therefore, this analysis has a much greater meaning than a seasonality, which only displays the absolute values. Of course, this does not mean that the spread cannot fall and be even cheaper. In any case, it helps me perfectly in timing entries and exits.

Technical analysis for soybean oil

The price has been exactly where I have expected it in recent weeks. The head and shoulder pattern was confirmed, and the price could not break through a strong resistance around 35 cents and dropped to 32.5 to 33 cents.




From a technical point of view, I do not exclude the fact that the soybean oil price will respond to the support and there will be a growth correction. In that case, it could stop again at the 35-cent level, which I still consider to be a very strong barrier. In other words, soybean oil can quietly continue moving sideways between about 33 and 35 cents.

Next possible grow correction is also suggested by the closest bull spreads, ie. the closest part of the term structure. Despite decline of the commodity prices in recent weeks, spreads are refusing to decline. The market seems to be stronger, than it seemed at first, and often this divergence indicates the trend turn.




This correction is, of course, not favourable for bear spreads. On the other hand, the chosen spread is still quite far away, and this move might not necessarily be harmful. And it will certainly be more favourable if the spread will roll into contango. So far, it is in backwardation (the spread is negative), which acts as a negative factor.


 COT analysis

The current mood in the market can be described as neutral. COT indicators are not at any extreme. Therefore, no scenario is out for the moment. By the way, the question which areas of the COT index for soybean oil I do consider to be overbought and which oversold was replied in my last article.


My overall point of view

As I have already written, I do not exclude a growth correction on soybean oil in the near future. It is suggested by technical analysis; market structure and it can not be excluded also by COT analysis.

On the other hand, I like the idea of distant bear spreads and the fact that they are currently cheap. The use of distant spreads has the advantage that they are still far away and do not respond so fast to the actual movements of the underlying asset as closer spreads. If the market will move to the side at least for some longer period of time, and there will be no significant penetration of 35 cents level, then I expect gradual rollover of the longer-term structure into the contango, from which the bear spreads will benefit.

That’s why I decided to close my original position on the ZLN18-ZLH18 spread and open more distant spread which was described in detail in the latest Spread Report ZLZ18-ZLV18. Of course, I take into account all negative factors, that is why I am adjusting position size. Meanwhile, I’m only planning a smaller position.



Warning: Please consider this as my subjective point of view on the market and do not consider it as an investment recommendation! If there is a major change in the market due to oil, we can also experience an abnormal year on bear spreads in soybean oil.



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