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Crude palm oil (CPO) has witnessed a strong rally this year. Malaysian CPO futures traded on the Bursa Malaysia Derivatives Exchange have surged 12 per cent in the first quarter of 2016. The rally has gathered momentum in the last two months, and the prices are up 14 per cent since January. The contract now trades at MYR 2,717 per tonne.
A sharp fall in production from Malaysia and Indonesia, the world’s largest producers of palm oil, due to El Nino, has fuelled CPO prices.
Data from the Malaysian Palm Oil Board (MPOB) shows that output from Malaysia, the second-largest global producer, has dipped since October last year. Monthly production is down 49 per cent from 2.04 million tonnes in October last year to 1.04 million tonnes in February this year.
Market experts forecast the total production for oil year 2015-16 (October to September) to be lower by 2 million tonnes compared to the previous year.
On the domestic front, the crude palm oil futures contract traded on the Multi Commodity Exchange (MCX) has risen 33 per cent in the first quarter of this year, taking cues from the Malaysian CPO contract.
It is currently trading near ₹550 per 10 kg.
There is talk in the market of demand shifting to soya oil due to the prolonged rally in palm oil prices. Soya oil is used as a substitute for palm oil. Though this is a threat to the rally, charts suggest that there is room for CPO prices to rise further.
Medium-term viewThe Malaysian CPO contract made a multi-year low of MYR 1,800 in August 2015 and surged to a two-year high of MYR 2,740 last week. Resistance is at around MYR 2,700 and MYR 2,750, which have held as of now and the contract has come off slightly from this high. A strong break above MYR 2,750 will see the rally extending to MYR 2,800. Further break above MYR 2,800 will then take the contract higher to MYR 2,900 and MYR 2,950 in the medium term.
On the other hand, if the resistance at MYR 2,750 is maintained, then there is a possibility of seeing a short-term corrective fall in prices. Strong support is seen between MYR 2,500 and MYR 2,400, which is likely to limit the downside for the contract.
Only a strong break below MYR 2,400 will turn the trend bearish. But such a strong fall looks unlikely at the moment and the CPO price could rally to MYR 2,900 and MYR 2,950 before we see any strong reversal.
On the domestic front, the 10 per cent rally last month in the MCX-CPO contract has taken it well above the 200-week moving average. The region between ₹475 and ₹450 will be a strong medium-term support which can limit any intermediate corrective fall. That said, a rally to ₹600 and ₹620 looks likely in the coming weeks.
Short-term viewResistance is in the ₹540-550 zone. Failure to decisively break above ₹550 can trigger a corrective fall to ₹510 and ₹500. Since the contract has rallied sharply in a short span of time, the chances of seeing a short-term corrective fall cannot be ruled out. The 21-day moving average at ₹508 is an important short-term support for the contract.
A strong break and a decisive close below this level can turn the outlook negative. Such a break can drag the contract lower to ₹490 and ₹480 thereafter.
On the other hand, a strong break above ₹550 can take the MCX contract higher to ₹580.
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