Bullish outlook seen for Malaysian crude palm oil futures

The benchmark active Malaysian crude palm oil futures contract broke out of a mid-term parabolic bowl accumulation pattern in the middle of March this year, a technical pattern that had been forming since July 2023.

Bullish sentiments, driven by expectations of increased exports, a weakening ringgit, and supportive crude and edible oils markets, have fuelled the upward trajectory.

Export estimates from cargo surveyors indicated a rise of 14 to 29 per cent for March compared to February. This increase is largely due to the month-long Ramadan, culminating with the upcoming Eid festival, which typically sees a significant spike in consumption, especially in the Middle-East region where large communal meals are a norm for breaking fast.

Although production estimates from millers also showed an uptick of about 16 per cent in March, it is important to note that this increase is compared against a low base in February when month-end stocks are at their lows. The stronger increase in exports combined with the slower rise in production has sustained bullish sentiments in the market. Official demand and supply figures from the Malaysian Palm Oil Board for March are due on Apr 15.

The Malaysian ringgit, the currency in which benchmark crude palm oil futures are traded, has continued to depreciate against the US dollar since mid-March, following a retracement near the 4.80 level on Feb 21 this year.

A weakening ringgit enhances the purchasing power of foreign buyers holding US dollars, thereby supporting palm oil prices. Based on a technical analysis of the US dollar/ringgit currency pair, the ringgit is anticipated to test the 4.80 level for the third time; a clear break through this level will provide further support to palm oil prices.

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Coincidentally, in mid-March, crude oil prices also broke through a parabolic bowl accumulation pattern that had been forming since Nov 7 last year. This upward momentum is expected to provide additional support to the edible oils market, as higher crude oil prices render palm and other edible oils more economically viable as biodiesel feedstock.

Soybean oil, the closest edible oil substitute to palm oil, is also displaying bullish technical signals, especially in the Chicago Board of Trade exchange’s soybean oil futures. A divergence confirmed since early March suggests a continuation of the bullish trend following a retracement to the 48 US cents per pound level. The high correlation between soybean oil and palm oil prices indicates that the bullish climb is likely to lend support to palm oil prices in the near term.

On the technical front, the active crude palm oil futures contract on the Bursa Malaysia Derivatives exchange had shown a bull flag consolidation pattern since Mar 14. The breakout from this pattern on Apr 1 indicates a continuation of the bullish trend.

This localised breakout, coupled with the breakout of the mid-term parabolic bowl accumulation pattern, has further propelled the upward momentum towards the resistance level of RM4,500 per metric tonne.

The movement towards this level is poised to strengthen from short covering, liquidations, and breakout buys. It serves as the resistance line of a longer-term parabolic bowl accumulation pattern that has been forming since July 2022, following the price decline from palm’s all-time high of RM7,268 per metric tonne in Q2 2022.

Given these factors, for the upcoming month, strong support is expected at RM4,150-4,200 levels, while strong resistance is anticipated at RM4,450-4,500 levels. A decisive breach below RM4,150 could trigger a retreat to the RM4,000 level, while a decisive breakout above RM4,500 could push prices towards the RM4,800 level.

In conclusion, amid various near-term price-moving factors, there is noticeable bias towards upward movement, with prices poised to challenge the resistance level of RM4,500 per metric tonne in the upcoming month. This positive momentum reflects a convergence of technical patterns and market dynamics, underlining the bullish outlook for palm oil futures.

The writer is a commodities strategist at Phillip Nova