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Do crude oil, soybean and palm oil prices correlate?

Kenan Layden - FFMC - Mon Nov 4, 10:09AM CST

When crude oil gapped lower last week, soybean and palm oil also dropped.

  • West Texas Intermediate closed down $4.40.
  • November soybeans were down on the same day over 13 cents and December soybean oil closed down $1.46.
  • November palm oil was only down 1 Malaysian ringgit (or about 23 cents).

Crude is down, crop oil commodities are also down, makes sense. What is surprising about this is that palm oil usually has much higher daily moves. Palm oil seemed to be traded more independently versus crude oil. This had me wondering – is this usually the case?

Crude oil affects soybean and palm oil prices due to use in biofuels. But how great is the impact? How much does palm oil affect the price of soybean products due to their similar uses?

To answer these questions, I ran a linear regression. Doing this assumes a linear relationship and normal distribution. Correlation does not equal causation, but it can show us a possible piece of the story in the relation of these commodities. Data was examined from 2002 – Present and from 2021 – Present, or post-COVID, which would exclude data when oil traded negative.

Post-COVID price fluctuations

The story this analysis tells us is mixed.

The effect of crude oil on prices of soybean oil, soybeans, and palm oil was much less post-COVID than when all data since 2002 was analyzed. Since 2002, palm oil has had the least correlation with crude oil as compared to soybeans and soybean oil, which is consistent with what was observed Oct. 28.

However, since 2021, palm oil has had the strongest relationship with oil prices. That is opposite to what was observed Oct. 28.

The data analysis also showed palm oil prices affect soybean oil and soybean prices much more than crude oil which makes sense since uses are more similar.

The big takeaway?

Crude oil prices likely explain some of the variance in price of soybean oil, soybeans and palm oil. Historically, crude oil has had more impact on soybean oil and soybean prices. However, this relationship has been weaker since COVID. Other fundamentals factors are likely more important, and this was not an exhaustive analysis.

Below is the data summary and graphs of palm oils relationship.

110424_crude_oil_relationship_since_2002.png

110424_crude_oil_relationship_since_2021.png

110424_palm_oil_relationship_since_2002.png

110424_palm_oil_relationship_since_2021.png

WTI_Crude_vs_palm_post_2002.png

WTI_Crude_vs_palm_post_2021.png

What the charts show

  • R2 Value, the coefficient of determination), shows how much of the variance in prices of soybean oil, soybeans, and palm oil may possible be explained by the price of crude oil.

The higher R2 value the more possible influence crude oil has on the price of soybean oil, soybeans, and palm oil in the top two tables.

In the bottom two tables the higher R2 value shows more possible influence of palm oil on soybean oil and soybean.  

  • R Value, or correlation coefficient, indicates the strength and direction of the relationship.

In the top two charts a higher R value indicates a stronger relationship between higher crude oil prices and higher prices of soybean oil, soybeans, and palm oil.

The bottom two charts show the relationship between palm oil and soybean oil and soybeans. The higher the value the stronger the relationship in prices.

To discuss further, please feel free to give me a call directly at 701-401-9600 or anyone on the AgMarket.Net team at 844-4AG-MRKT.

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