Commodity Analysis

Haze helps crude palm oil

Gurumurthy K | Updated on January 22, 2018 Published on October 11, 2015



Fears of the recent haze affecting crop output have taken prices sharply higher

Crude palm oil prices have risen sharply after tumbling to a six-year low in the last week of August. Prices shooting up about 16 per cent in just six weeks have taken everyone by surprise.

The major trigger for this price reversal came from the recent haze reported in Malaysia and Indonesia over large tracts of palm plantations.

Malaysia and Indonesia account for about 85 per cent of the world’s palm oil production. Haze is a phenomenon in which dust, smoke and other dry particles cloud up the atmosphere. The condition is expected to affect the crop as well as the harvest, thereby resulting in lower palm yield.

Increasing worries on El Nino conditions and the Malaysian ringgit weakening against the US dollar are also the other factors that have supported the palm oil price rally over the last one month. A weaker Malaysian currency makes palm oil a cheaper alternative to the dollar-denominated soyabean oil.

After the rally, crude palm oil prices have retreated in the past week on profit booking ahead of the inventory data release.

On the charts, the recent rally suggests relief for a commodity which has been tumbling for more than a year. Key supports are ahead and if they hold, prices can continue to push upwards.

Medium-term view

On the Malaysian palm oil futures contract traded on the Bursa Malaysia Derivatives Exchange, the downtrend that was in place since June has halted in August. The contract fell to a six-year low of MYR 1,800 per tonne on August 26 and has since reversed higher from there to MYR 2,395 on September 29. After being range-bound since then, the contract declined in the past week. It is currently trading at MYR 2,168.

Key supports are poised at MYR 2,065 and MYR 2,000.

Though these supports can be tested in the short term, the outlook will turn bearish only if it declines below MYR 2,000. Such a break will increase the danger of the contract revisiting MYR 1,900-1,800 levels. But a reversal from MYR 2,065 or MYR 2,000 will see a rally once again to MYR 2,350 and MYR 2,400.

A strong break above MYR 2,400 will open the doors to MYR 2,500 and MYR 2,600.

On the domestic front, the crude palm oil contract traded on the Multi Commodity Exchange has reversed lower in the past week after recording a high of ₹436.4. It is currently poised at ₹419. A key support is at ₹400 which could be tested in the short term.

However, there is no danger of any sharp fall unless the contract declines below ₹400. A strong reversal from ₹400 will have the potential to take it higher to ₹450 and ₹470 thereafter.

But if the contract fails to reverse higher and breaks below ₹400, the danger will increase for a fall to ₹380 and ₹375. A break below ₹375 can drag it to the next target of ₹350.

Short-term view

The 200-day moving average resistance at ₹434 has halted the uptrend that had begun in the MCX futures contract, from its low of ₹351.8 on August 26. There is a strong likelihood of a fall in the coming days.

The 21-day moving average at ₹410 is the next support, which is likely to be tested. A further break below ₹410 can take the contract to the next targets of ₹404 and ₹400.

The bullish momentum will return if it records a strong break and close above the 200-day moving average resistance. Such a break can take it higher to ₹445 and ₹450 thereafter.

Published on October 11, 2015
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