The decline in crude oil prices on Wednesday and Thursday should not be a surprise since data from the vegetable oils markets has often forecast demand and pricing in the market, said Erik Norland, a senior economist for the CME Group, a Chicago-based derivatives marketplace.
With the consistent build up of inventory, the 5% drop off in crude oil prices to the lowest level so far in 2017, is not unexpected since inventories of oil in the U.S. have risen by 7.5% year over year, said Norland who has been bearish on crude oil prices for awhile.
The increased pace of U.S. production has made high prices difficult to sustain and could have sparked the selloff, leading prices to fall to $50 a barrel, he said. Since the end of July, production in the U.S. ramped up to 660,000 barrels per day.
"The U.S. inventory as colossally large as the number of rig counts have exploded," Norland said. "With more months of strong growth in output, producers could add another 300,000 to 400,000 barrels per day, canceling out a large portion of the 1.5 million barrels that OPEC intended to cut."
The unprecedented growth in production by shale producers since 2012 has pushed up inventories to extremely high levels, increasing the existing glut. The Energy Information Administration said this week that U.S. production will increase by 10% compared to the current levels or 10 million barrels a day by the end of next year.
Even Harold Hamm, the CEO of Continental Resources, a large shale producer and an informal advisor to President Trump on energy issues, warned Wednesday that U.S. producers could in fact "kill" the oil market if it continues to produce oil at its current rate. At a Houston conference of oil executives, CERAWeek by IHS Markit, he said that production "could go pretty high" and cautioned that drilling needs to be "done in a measured way or else we kill the market."
OPEC had said they would review the cuts made by its countries in May to decide if they should further continue the reduction, which could add further downward pressure for crude oil prices.
"If OPEC decides to throw in the towel, it could be really bad in for oil prices," Norland said.
Crude oil prices continued to dip on Thursday, falling to $48, but the immediate effect may not be passed onto consumers, said Patrick DeHaan, a senior petroleum analyst for GasBuddy.com, a Boston-based provider of retail fuel pricing information and data.
"We may stay under $50, but it might not mean much for gasoline prices since refiners are processing less during maintenance, a partial reason for the big builds we have been witnessing," he said.
The biofuel mandates in 64 countries, including the 27 nations of the European Union, could have affected the niche vegetable oils market during the past decade. When the major oil producers refine crude, they include additives such as ethanol. Although the soybeans market is only 5% in dollar volume compared to the crude oil market, it remains "very sensitive to changes in supply and demand," Norland said.
"These countries which have or are considering biofuel mandates will end up turning to soybean or palm or canola oil for fuels," he said. "When there is an oversupply of oil, refiners push back and only use the minimum amount possible of vegetable oil in fuel blends, driving the price lower. This appears to anticipate a coming decline in crude oil prices. By contrast, if there is shortage of crude, refiners add more vegetable oil to the blends."
The prices for soybeans dipped by 15% in early December after reaching a peak of $38 to $33 a bushel and palm oil prices saw a similar decline. Vegetable oils have done a "phenomenal job in the last decade and half of forecasting the peaks and bottoms of crude oil prices," Norland said.
"It's obvious that vegetable oils aren't causing crude oil prices to move up or down," he said. "The relatively small size of the market means that vegetable oil prices may be highly sensitive to subtle supply and demand shifts in crude oil."
When crude oil prices fell in late 2006 and early 2007, soybean oil prices began to surge, before the January 2007 to July 2008 crude oil bull market, Norland said. When soybean oil prices plunged in December 2008, crude oil declined four weeks later. By February and March 2009, crude oil prices rebounded, but soybean oil had already rallied.
"While crude oil prices range-traded between $80 and $115 per barrel from 2011 through mid 2014, vegetable oil prices began a long bear market that foreshadowed the abrupt collapse of crude oil in late 2014," he said. "Soybean oil prices bottomed in August and September 2015, almost six months before crude oil prices hit bottom in January and February 2016."
Since vegetable oils are increasingly being used as a fuel, its demand would track crude prices, said Patrick Morris, CEO of New York-based HAGIN Investment Management.
"That a niche, smaller commodity might lead the trend might just be a function of the size of the market," he said. "With only 3 billion fuel providers, they would be able to act ahead of the larger crude market."