Crude oil bearishness seeps into canola market

CNS Canada — The falling price of crude oil is a bearish force weighing on many agricultural commodities, including canola, according to a Prairie market analyst.

“Crude oil has been a driver of this weakness,” said Errol Anderson, president of ProMarket Communications in Calgary.

In the past month, crude oil dropped roughly US$9 per barrel while canola fell C$28 a tonne.

NYMEX’s August crude oil contract was valued May 23 at US$51.64 a barrel. By Friday morning, June 23, it was US$42.90.

On May 23, the dominant November canola contract was at C$501.90 a tonne. Friday morning it opened at C$473.50.

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“There’s a lot of energy trader anxiety right now,” said Anderson. “Crude oil is the king of commodities.”

One of the main theories supporting his arguments lies in the way large funds adjust their portfolios. If they start losing value in crude oil they are often forced to rebalance other assets.

“Large spec traders must maintain set asset allocations across commodities,” Mike Jubinville of ProFarmer Canada wrote in an email. “So action in one affects actions in the others.”

This, along with some of the weather issues facing canola, makes Anderson believe prices are poised to sink even lower.

Earlier this week, canola broke below C$477.60 a tonne, which Anderson said was a key support level.

“So to me canola is going into a lower trading window, into summer.”

The commodity world will breathe a sigh of relief, though, if crude oil can reverse course and rise above the psychologically-important US$50 per barrel level, he added.

“But if crude breaks below US$40 a barrel, I’m kind of worried about the ag sector, everything.”

It doesn’t appear the global supply of oil will drop dramatically in the very near future.

The Energy Information Administration reported on Thursday that the number of U.S. drilling rigs had raised the country’s crude oil production to 9.3 million barrels a day, up 850,000 barrels a day from September.

China was recently forced to temporarily shutter some of its biggest refineries during the third quarter, about 10 per cent of its refining capacity, because gasoline and diesel reserves were so high.

— Dave Sims writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting. Follow CNS Canada at @CNSCanada on Twitter.

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