10/01/2013 (Oil Voice) - As we know, petroleum stockpiles are high but volatile: a January 4 report from Moody's Analytics said that US crude oil inventories fell by 11.1 million barrels for the week ending December 28, obliterating the consensus expectation of a 1.1 million-barrel decline. Conversely, gasoline inventories rose by 2.6 million barrels, slightly above consensus expectations of a 2.2 million-barrel build, and distillate inventories rose even more (by 4.6 million barrels), far surpassing the consensus expectation of a 1.3 million-barrel increase. Overall US oil demand on this basis inched higher by about 35 000 barrels per day (a fraction of 1% of total consumption) for a 12-month growth of 3.1%, making certain that day traders would push prices higher going into New Year trading.

Low stockpiles exist in another oil patch - outside petroleum - with subtle but sure impacts on how petroleum prices can move. As Germany's Oil Weekly reported on Dec 21, US soybean stocks were probably down 11 million tons from one year previous, taking them to a record low relative to consumption, but with only minor reaction, to date, from vegetable oils and oilseeds traders. Consensus views were that tight supplies might be unlikely to last. Reporting for the same news source, January 4, analysts however underlined that US corn gluten feeds output is very unlikely to grow this year, for a number of reasons including the tight domestic corn supply situation, helping squash US exports of corngluten and meal to the EU-27 from 0.9 million tons in the first 10 months of 2011, to only 0.2 MT in Jan/Oct 2012. This means more European imports of oilseeds and vegetable oils from elsewhere, especially SE Asian palm oil, to compensate.

As this Index Mundi chart shows, correlation of Brent crude and palm oil prices is very high.

Today and through Q1 2013 the recent remarkably low price for palm oil (below $790 per metric ton) is almost certainly history: palm oil prices will rise. This may help place a safety cushion under crude oil prices and slow the trend rate of decline, when they start to seriously move downward.

THE BIODIESEL STORY

World Bank and industry studies underline that pre-2006, and post-2006 was a watershed for relations and cross-impacts of vegetable oils with petroleum: a 2008 report from the Bank shows that the 4 most traded oils (palm, soy, sunflower and colza) had a price correlation average for the 22 years 1983-2005 of as low as 0.07 and never more than 0.38. By March 2008 none had a lower correlation than 0.82 and as the above Index Mundi chart shows, correlation is now almost perfect.

As this World Bank report of 2008 by Malaysian researchers showed that at the time, in 2008 there was no "two way street" impact on crude oil prices, from vegetable oil price moves.

What has likely changed is that we now have a two-way process, for a growing number of reasons.

These include the simple "wealth effect" leading to growing demand for high quality vegetable oils by the world's biggest consumer nation - India. Reduced availability of vegetable oils to produce petroleum saving biofuels, but higher revenues for vegetable oil producers and exporters, especially Indonesia, enables these oil producersm to easily keep pace with rising petroleum import prices, and import more. Also, as shown by US soybean meal and oil trade in recent years, China's import demand for US oil and oilseeds stays high despite high prices, encouraging US farmers to plant and produce more. Whenever petroleum prices soften, demand for biofuel end-use vegetable oils should in theory soften, but the process is slow and impacted by ongoing subsidy-based expansion of biodiesel in many countries. In addition the recent decline in vegetable oil prices is unlikely to hold, with a probable upcoming trend to fast recovery of the benchmark for global vegetable oils - Malaysian crude palm oil (CPO) prices - and restored ability of other major vegetable oil exporter countries, including the Philippines and Sri Lanka to import more petroleum.

Financial futures tracking the vegetable oils and oilseeds have radically expanded in volume and availability since around 2005, and since 2008 their price movement shows a much closer-coupled price relationship between the two "complexes", vegetable oils and petroleum products, due to the increasing ability of financial players to rapidly shift between the two, knowing their generally high price correlation. The present context suggests that under the right circumstances, major falls in vegetable oils prices can impact crude oil on the downside, and high vegetable oils prices can slow the decline of crude oil prices.

IMPACT OF POLICY SHIFTS

Through 2010-2012 several world-class biodiesel policy programmes have been scaled back or stretched to longer timeframes, with an increasing focus on the highest yield vegetable oil-to-biodiesel pathways, favouring palm oil, colza oil and soy oil in the US and Europe and bolstering world import demand for palm oil exports from Indonesia and Malaysia. Underlying this policy shift to higher net energy yield and efficiency, ongoing R&D in algae-source biofuels, and nanotechnology-aided conversion processes reflects the continuing drive to diversify energy supplies and sources. In turn this requires support to biodiesel and bioethanol fuel demand, and subsidy for these fuels.

Maintaining high producer prices for biofuels, but low pump prices in turn bolsters high petroleum prices because the real price advantage of petroleum remains, and high filling station prices for petroleum-based fuels masks the still uncompetitive status of biofuels. Related issues such as reducing carbon emissions and favouring cleaner fuels also bolsters demand for non-petroleum fuels.

The agroresource demand implications, including land and irrigation for scaling up biofuels production set limits for global present-generation biofuels, which in turn bolsters the role and significance of petroleum-based fuels. This bolsters demand and prices for conventional fuels. The net result is a context where high-cost biofuels including biodiesel tend to bolster recent and present price levels for petroleum and slow the decline of benchmark crude prices.