The Hindu Business Line : Veg oil prices may rise; open interests in futures higher

Chennai, Oct 13 Vegetable oil prices, which have been battered in the global markets meltdown in the last fortnight, may claw their way back, particularly on rising open interest and “short squeezing” on Bursa Malaysia or the Malaysian Derivatives Exchange.

The rising open interest signifies that many traders have sold “short” or without actual stocks on hand, while there are other factors such as festive demand and possibilities of India imposing import duty on vegetable oils to ensure domestic oilseed prices do not crash and farmers are not affected.

Crude palm oil third-month or benchmark contract prices have declined to 1,763 Malaysian ringgit (Rs 24,000)a tonne as on Monday from a high of 4,400 ringgit (Rs 58,000) a tonne on March 3 this year.

Positions

Analysts point out that the open interest in crude palm oil contracts has increased from 42,064 on March 3 to 81,694 on October 10. (See Table)

“Such a situation cropped up on November 8, 2006. Then, crude palm oil benchmark contract ruled at 1,674 ringgit a tonne and open interest was 90,054. The rise which started then, culminated in 4,400 ringgit in March this year. Already, crude palm oil has touched 1,427 ringgit before closing at 1,763 ringgit on Monday,” said Mr Ambi Sivaramakrishnan, an analyst.

As prices begin to decline, some of the market players tend to sell without stocks on hand at higher prices before attempting to square off by buying at lower prices. The near doubling of the open positions signifies that traders have considerably gone short.

“Even traders who had vacated their positions on Chicago Board of Trade seem to have gone short here,” say observers.

SOY PRICES SLIDE

Similarly, in line with the general declining trend, prices of soyabean and soya oil have declined to $9.30 a bushel and $37.60 a pound respectively. Open positions soyabean are 3,64,000, while in the oil, they are2,56,000.

Analysts point out to reports that the yield on US soya is likely to be lower at 39.5 per cent this year against 40 per cent last year. This could prop up the prices.

If the prices are to fall further, there may be no sellers. “Beyond a particular point, palm oil producers may find it better to let their crop go dry than harvest. That will lead to rise in prices as production falls. Therefore, it is likely that prices may not fall further and could touch 2,000 ringgits soon,” said Mr Sivaramakrishnan. “Those who have gone short cannot take high risk and therefore, will now be forced to close their position leading to rise in the prices,” he said.

However, crude palm oil could face resistance at 2,337 resistance but if it goes past that, then it could be up to 2,650 ringgit and further to 3,350 ringgit.

Analysts point to the festive season, including Christmas, that is ahead. “Moreover, winter has begun in the Western world that could lead to rise in natural gas prices, which in turn will spark an increase in crude oil and vegetable oil prices,” they say.

SHIFT IN PRODUCTION

On the other hand, with castor prices ruling very high, growers in Latin America, particularly Brazil, could shift, leading to decline in soyabean production.

“Also, the current prices are favourable for high networth individuals to buy vegetable oils and stock them at Rotterdam. There is an anticipation that soyabean production will be short of demand. These factors could push up their prices,” the analysts add.

China, which had kept off the global vegetable oil market, is also back with prices showing a tendency to rise. A factor pointing out to this is that its soyabean imports last month were the highest since August 2004.

Malaysia’s move to reduce its stockpile from a record 1.9 million tonnes (mt) by increasing the quota of crude palm oil exports to three mt from two mt a year could also push up the prices.

“One should not be surprised if we witness sharp rise in October contract prices when they are scheduled to close on October 15. This is because people who have gone short may try to square off. Soyabean and crude oil witnessed such a phenomenon last month when there was over 20 per cent rise in prices on the day the contract ended,” they said.

The other positive factor could be the pressure on the Indian Government to raise Customs duty on vegetable oil imports as their prices have declined close to the minimum support price.

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