Commodity Analysis

A volatile year for crude palm oil

Gurumurthy K | Updated on January 17, 2018 Published on August 20, 2016

Inability to break key hurdles may halt the current rally in prices

It has been a volatile year so far for the crude palm oil (CPO) prices. The Malaysian CPO futures contract traded on the Bursa Malaysia Derivatives Exchange surged about 24 per cent from MYR 2,200 per tonne in January to a high of MYR 2,740 in April following drop in production in Malaysia and Indonesia, the world’s largest producers of palm oil. But, prices corrected thereafter and dropped to a low of MYR 2,280 by July.

Malaysia had increased the palm oil export tax from zero to 5 per cent for April and then to 6 per cent for July. The country’s exports have also tumbled 41 per cent from 4.78 lakh tonnes in March to 2.82 lakh tonnes in July. A build-up in inventories due to slowdown in export demand also added to pressure on prices. Inventory surged 6.8 per cent from 9.5 lakh tonnes in March to 10.2 lakh tonnes in July.

However, in the last few weeks, CPO prices have again started to move up. Revival in demand from China and India ahead of the festival season and increase in Indonesian exports is also aiding the price rise. Malaysian CPO prices are currently at MYR 2,852.

On the domestic front, the Crude Palm Oil futures contract traded on the Multi Commodity Exchange (MCX) fell to a low of ₹484.8 per 10 kg in July from its April high of ₹578. The contract has reversed sharply higher since then and is currently poised near the April high at ₹563. Though there is a possibility of a short-term correction, on the charts, there appears a strong likelihood of the contract extending its rally further over the medium term.

On the charts

The Malaysian CPO contract has risen over 24 per cent in the last five weeks. This rally has taken the contract well above an important resistance in the MYR 2,700- 2,750 zone. At the moment, the resistances at MYR 2,900 — the 50 per cent Fibonacci retracement level and MYR 3,000 — the psychological resistance, are restricting the contract from rallying further. A strong break above MYR 3,020 is needed for the contract to gain fresh momentum. Such a break can take it higher to MYR 3,160 — the 61.8 per cent Fibonacci retracement level in the short term. A further break above MYR 3,160 will see the rally extending to MYR 3,400 over the medium term.

But if the contract fails to break above MYR 3,160, there is a possibility of a corrective fall to MYR 2,800 or MYR 2,700 thereafter. In such a scenario, the broader sideways range of MYR 1,900 – 3,100 within which the contract has been trading since 2012 will remain intact. Whether the contract manages to break above the MYR 3,160 resistance or not will be crucial in deciding the next leg of move over the medium-term.

On the domestic front, the MCX CPO contract, which moves in tandem with the Malaysian CPO contract, is on a strong footing. The 21-day moving average is on the verge of crossing over the 100-day moving average, which is a bullish signal. It implies that the current uptrend is likely to remain intact.

Also, there is strong support in between ₹530 and ₹500 which can limit the downside in the near term. A rally to ₹600 or ₹620 looks likely in the coming weeks. The region between ₹600 and ₹630 is a crucial resistance zone for the domestic contract. A reversal from this resistance zone may trigger a corrective fall to ₹575 initially.

If the fall extends, breaking below ₹575, then the contract can target ₹530 and ₹500.

On the other hand, if the contract manages to rise past ₹630 decisively, it can target ₹650 or higher levels thereafter.

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