SPREAD TRADING STRATEGY ON COMMODITIES
This spells trading opportunity for us as Palm Oil and Soybean Oil are generally considered substitute products, which means, at a large enough price difference, buyers may hop over to buy the cheaper one. Eventually closing the price gap back to its historical mean.
Some potential tailwinds for Crude Palm Oil include;
1) The reopening of China, which would increase the demand for palm oil from the world’s 2nd largest importer of the product.
2) Biofuel Mandates, which would put higher demand pressure on Palm Oil .
3) Slowing production growth in palm oil could lead to supply-demand imbalances, pushing palm oil higher as supply falters.
One way to trade this price divergence would be to short the Soybean Oil – Palm Oil spread. This trade can be set up by selling 1 Soybean Oil Futures and buying 1 USD Malaysian Crude Palm Oil Futures . However, do note that in such a set-up, the position is not fully ‘hedged’ as the contract units are different, 1 Soybean Oil Futures has a contract unit of 60,000 Pounds (~27.21 metric tons) while 1 Crude Palm Oil Futures is for 25 metric tons.
Sources:
Some potential tailwinds for Crude Palm Oil include;
1) The reopening of China, which would increase the demand for palm oil from the world’s 2nd largest importer of the product.
2) Biofuel Mandates, which would put higher demand pressure on Palm Oil .
3) Slowing production growth in palm oil could lead to supply-demand imbalances, pushing palm oil higher as supply falters.
One way to trade this price divergence would be to short the Soybean Oil – Palm Oil spread. This trade can be set up by selling 1 Soybean Oil Futures and buying 1 USD Malaysian Crude Palm Oil Futures . However, do note that in such a set-up, the position is not fully ‘hedged’ as the contract units are different, 1 Soybean Oil Futures has a contract unit of 60,000 Pounds (~27.21 metric tons) while 1 Crude Palm Oil Futures is for 25 metric tons.
Sources:
- https: //www .tradingview.com/u/inspirante/
https: //www .cmegroup.com/trading/agricultural/files/spreading-cbot-soybean-oil-and-bmd-crude-palm-oil.pdf
https: //www .cmegroup.com/education/articles-and-reports/palm-oil-spread-volatility-creates-opportunities.html
https: // jakartaglobe.id/business/palm-oil-prices-production-to-drop-in-2023-gapki
https: // oec.world/en/profile/hs/palm-oil
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