Commodity Call. Supply glut cools palm oil

Crude palm oil prices have been moving southwards for more than a year now, as demand for bio-diesel (which uses palm oil as input) has fallen due to the sharp correction in crude oil prices. The record harvest in soyabean and lower prices have also seen demand shifting from palm oil to soyaoil in major consuming countries like India and China. In March, Indonesia announced a plan to increase the blending rate of palm oil with diesel, to 15 per cent from 10 per cent currently.

This move was supposed to mop up excess supply in the market and aid prices. But as the move is yet to be implemented, the supply glut is keeping prices under pressure.

According to data from the US Department of Agriculture, global palm oil production is expected to rise 3.5 per cent to 61.45 million tonnes for the current oil year, 2014-15 (September-August) and another 6 per cent to 65.17 million tonnes the next oil year.

The surge in production could see inventories rising, thus keeping prices under check.

On the global front, the Malaysian palm oil futures contract traded on the Bursa Malaysia Derivatives Exchange is currently at MYR 2,031 per tonne.

A crucial long-term trend line support is at MYR 2,000 and MYR 1,985. These supports are likely to be tested in the short term. Whether the contract breaks below MRY 1,985 or reverses higher from there will decide the next leg of the move.

A strong break below MYR 1,985 will see the current downtrend extending towards MYR 1,900. Further break below MYR 1,900 will put the contract in the danger of tumbling to even MYR 1,700. On the weekly chart, the price action reflects a formation of a rounding pattern.

This pattern suggests that the contract is more likely to break and fall below the MYR 2,000-1,985 support zone.

On the domestic front, the MCX-Crude Palm Oil futures contract is currently at ₹400 per 10 kg. It has key supports at ₹378 and ₹372. A reversal from these could ease the downside pressure. Such a bounce will have the potential to take the contract higher to ₹420 and even ₹450 thereafter. But a break below ₹372 can drag the contract lower to ₹360 initially.

Also, a further break below ₹360 will see the downtrend extending to ₹350 and ₹345.

Charts suggest that the short-term trend in palm oil is down.

A wedge formation is visible on the charts over a prolonged period between October last year and mid-July.

The bearish breakout of this pattern last month marks the beginning of a new leg of downmove.

It also suggests that the overall downtrend that has been in place since March last year remains intact.

Resistances are at ₹420 and ₹450.

A fall to ₹378 and ₹372 — the target level of the wedge pattern — looks likely in the coming weeks.

The downside pressure will ease only if the contract records a strong break and close above ₹450.

The ensuing target on such a break will be ₹475. But such a strong rally appears unlikely in the near term.

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