Crude palm oil prices turn bubbly

Uncertain weather conditions and increasing bio-diesel consumption to keep prices higher



At the Multi Commodity Exchange, crude palm oil futures contract has dropped 10 per cent since its March high of ₹619.6 per 10 kg.

Recent rains in the top producing countries — Indonesia and Malyasia — have eased the threat of a supply shortfall that was anticipated earlier due to dry weather conditions.

In 2013, the commodity had witnessed a strong rally following the new bio-diesel mandate in Indonesia and Malaysia. The increase in the mandatory amount of palm oil used in bio-diesel boosted demand for the commodity.

Slowdown

Both demand and supply for the marketing year (MY) 2013-14 (October-September) are expected to increase at a slower pace than in the previous years. The US Department of Agriculture expects global crude palm oil production in MY 2013-14 to increase 4.8 per cent to 58.4 million tonnes. This is lower than the average 6.6 per cent production increase seen in the previous three years. On the other hand, global consumption is expected to rise 3.6 per cent in 2013-14 to 56.9 million tonnes, lower compared with an average 6.8 per cent rise in the last three years.

Positives

There are two factors that could pressure supply and support prices. One, the increasing consumption of crude palm oil in bio-diesel production. The Government of Indonesia expects its bio-diesel consumption to shoot up sharply to 4 billion litres in 2014 from 1.07 billion litres the year earlier. This estimate is much higher than the market estimate for 2014, which is pegged at 2 billion litres.

The second factor is the impact of the developing El Nino. El Nino is likely to affect weather conditions adversely and hit crop yields in the later half of the year. This could send prices higher and see a rally similar to the one last year. However, if El Nino fails, then crude palm oil price can see a correction in the later part of 2014.

India largely relies on imports to meet its domestic demand of palm oil. The domestic consumption is expected to increase by 8.5 per cent to 9.1 million tonnes in MY 2013-14. In order to meet the domestic demand, imports will rise by around 8.3 per cent. Palm oil being an imported commodity, fluctuation in the Indian rupee will have a major impact on the domestic price of the commodity.

If the rupee loses momentum after the elections, then the price of palm oil will go up.

Outlook

Long-term view: The MCX crude palm oil futures contract (₹557) is in a strong long-term uptrend. The contract is up 40 per cent from its December 2012 low of ₹396.5 per 10 kg. Key long-term support is at ₹460. Intermediate support for the contract is at ₹500. Declines below this level can drag the contract to ₹460. A break below the long-term support at ₹460 looks less probable. The uptrend will remain intact as long as the contract trades above this level. A rally to ₹700 looks likely in the coming months. This level of ₹700 is a crucial long-term resistance level. A reversal from this level will have the potential to drag the contract lower to ₹500.

Medium-term view: The medium-term trend is up. The contract is moving in a bull channel since August 2013. Within this channel, the contract is coming down now. The probability looks high now for it to move down further to test the channel support at ₹535. A fall below this level is less likely. Having said this, a reversal from ₹535 can take the contract higher towards ₹630, the upper end of the channel. On the other hand, if the channel support at ₹535 is broken, then the contract can fall to test the 200-week moving average, which is currently at ₹505. Such a break will be an initial sign of a medium-term trend reversal.

Short-term view: The short-term trend is down. The MCX-crude palm oil contract made a peak of ₹619.6 in March and has tumbled 10 per cent from this high. The 21-day moving average currently at ₹575 will be an important short-term resistance. The outlook will remain bearish as long as the contract trades below this level. The 200-day moving average at ₹552 is the key short-term support. A reversal from this level can take the contract to test the resistance at ₹575. If the contract manages to breach the resistance at ₹575 immediately, it can move up to ₹600 in the short term. But, a break below ₹552 can drag the contract lower to ₹540.

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