The most closely watched development over the weekend was the progress in talks between the United States and Iran. Based on the weekend news flow, there has been some progress, but the core issues remain unresolved. Since the Strait of Hormuz was blocked a month ago, Gulf countries’ crude inventories are also nearing full capacity. If, during this two-week ceasefire window, the United States and Iran still fail to reach a better agreement that ensures safe passage through the strait, the market is likely to further lift long-term inflation sentiment, creating trading opportunities in the forward contracts of many commodities.
I. Focus on the Forward Crude Oil Contract
When this round of oil price gains first began, the market initially believed the blockade of the strait would be only a short-term disruption. As a result, nearby crude contracts surged into a steep premium, while the three-month-forward futures contract barely reacted, causing the spread between the near and far WTI crude oil contracts to reach as high as 40 dollars per barrel, or about 50% in premium terms.
However, as the blockade has continued and negotiations have failed to make progress, the duration of the Strait of Hormuz closure may be significantly extended. This has led financial markets to re-examine the undervaluation of forward contracts. Starting from Friday night last week, the performance of longer-dated crude contracts has clearly outpaced that of nearby contracts. Even so, the price gap between them, specifically the May and September contracts, still stands at as much as 17 dollars per barrel. If the strait remains blocked for another two months, the current September crude oil futures contract would move closer to the spot price, converging toward the current May contract level, thereby capturing time-spread returns.
If the strait is reopened, oil prices would still decline, but since the forward contract carries only a small premium, its downside would be less severe than that of the nearby contract. This gives the longer-dated crude oil futures contract a better risk-reward profile for establishing long positions. Those looking to buy oil on dips may want to pay closer attention to the forward crude contract.
II. In an Inflationary Setup, Watch the Lagging Soybean Meal Market
Rising oil prices, which are unlikely to fall back quickly in the near term, make higher fertilizer costs almost inevitable. As May approaches, the new U.S. soybean planting season begins, and the increase in full-year soybean planting costs limits the downside floor for soybeans, making soybean-related agricultural products one of the better beneficiaries of higher oil prices.
Previously, the rally in soybean complex prices was mainly driven by soybean oil. At present, crude oil has entered a volatile range, and soybean oil has also lost upward momentum. As a result, the soybean complex has shifted toward being driven by soybean meal.
Soybean meal is relatively lagging among agricultural products because it is a staple, demand is inelastic, and price sensitivity is relatively low. Still, it is the ballast stone of oil plant profit. When soybean oil prices fall, crushers often raise soybean meal prices to balance processing profits. Therefore, when soybean oil corrects, that is often when soybean meal gets a chance to catch up.
At present, soybean meal remains a lagging product. If the Strait of Hormuz blockade continues and soybean prices move higher, soybean meal will not stay cheap for long. If the strait is reopened and soybean oil prices adjust, soybean meal is likely to see a compensatory rally. It is a product that offers both upside potential and downside resilience, and it is worth watching.
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