Commodity Call. Lower output boosts crude palm oil

Prices of crude palm oil have risen about 7 per cent in the last two weeks. The palm oil futures contract traded on the Bursa Malaysia Derivatives Exchange has risen to MYR 2,349 per tonne from MYR 2,200 per tonne. Mirroring this, on the domestic front, too, the CPO contract traded on the Multi Commodity Exchange (MCX) has risen about 3 per cent to ₹432.5 per 10 kg from ₹421 per 10 kg.

Expectation of lower production this year following the threat of El Nino is supporting the commodity’s price. The Malaysian government has forecast production to increase to 20.1 million tonnes in 2016 from 19.96 million tonnes in the previous year. The 0.7 per cent increase forecast in production is much lower than the average 2 per cent increase seen in the last three years from 2013 to 2015.

Data from the Malaysian Palm Oil Council (MPOC) show that output is sharply lower to 13.99 million tonnes in December from 20.37 million tonnes in October — a slide of over 31 per cent in the last two months. The inventory data has also shown a drop in December after having risen continuously for five months since July. Crude palm oil inventory in December fell 9.5 per cent (month on month) to 2.63 million tonnes from 2.91 million tonnes in November.

Supply disruption is expected to keep the downside limited for the commodity. The charts suggest that the long-term downtrend in crude palm oil is likely to reverse.

The Malaysian crude palm oil futures contract has been in a strong uptrend since August. The contract recorded a six-year low of MYR 1,800 last year in August and rose to a high of MYR 2,395 in October. The pull-back from this high halted at MYR 2,086 in November and the contract has reversed higher again. This reversal, which has happened from near the 50 per cent Fibonacci retracement support level of MYR 2,097, keeps intact the uptrend that had begun from the August low of MYR 1,800. It also suggests that the down-move from October to November is just a corrective fall.

Strong support for the contract is in the MYR 2,200-2,100 zone. An intermediate decline to this support zone is more likely to find fresh buying interest coming into the market. Immediate resistance is at MYR 2,440. A strong break above this level can take the contract higher to MYR 2,530 and MYR 2,550, which are the key medium-term resistances. A decisive break above MYR 2,550 will signal a long-term trend reversal and will increase the chances of the contract moving further higher to MYR 2,700 thereafter.

On the domestic front, the crude palm oil futures contract on the MCX has broken the downtrend that was in place since 2014. Immediate resistance is at ₹445 — the 21-month moving average, which is likely to be tested in the coming weeks. A further break above this hurdle can take the contract higher to ₹458 — the 100-week moving average resistance level.

The 21-week moving average at ₹407 is a significant support for the contract. An important trendline support is at ₹398. Only a strong break below ₹398 would put the contract under pressure.

The short-term trend is up. The strong rally that has been in place since mid-December has decisively broken the 200-day moving average at ₹418. The 21-day moving average is on the verge of crossing over the 200-day moving average.

This suggests that the bullish momentum is expected to continue. A rise to ₹440 and ₹445 looks likely in the short term. Strong support is in the ₹420-415 zone. Only a strong break below ₹415 will turn the short-term outlook negative and drag the contract lower to ₹405 and ₹400 levels.

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