Avtar Sandu

Crude palm oil futures rose sharply over the last 2 weeks from lows of RM3,700 (S$1,150) a tonne, propelled by gains in soybean oil on the Chicago Board Of Trade (CBOT) and expectations of better exports for the month of August. The world’s largest producer and exporter, Indonesia, recently announced an increase in export taxes for shipments for the week of Aug 9 to Aug 15, giving Malaysian crude palm oil (CPO) priced in ringgit a competitive edge.

Owing to ideal rainfall and favourable weather conditions, a surplus in palm oil production is expected to hit markets in August and September as the seasonal peak production season gets underway. Inventories of top exporter Indonesia have swollen to 10 million tonnes compared to the average of 5 million tonnes, fully utilising capacity storage in tanks, wells and barges. After a drop from highs by 45 per cent, Indonesian palm oil is currently the cheapest vegetable oil in market.

Looking at the weekly chart, palm oil double topped at levels of RM7,200 on Mar 9, 2022, followed by highs on Apr 29, just after the Indonesian government announced an export ban on Apr 28. The catastrophic move to safeguard local prices and counter the threat posed by ongoing geopolitical crisis that was expected to halt the global supply of soybean oil, sunflower oil and other vegetable oils, backfired by destroying local demand and increasing Indonesian stockpiles.

Soaring palm oil prices amid a potential recession along with the economic downturn in China threatened demand even further, resulting in a free fall in palm oil prices to the lows of RM3,700 in mid-July.

The historic high and low levels of RM3,000 to RM3,200, before palm oil started an uptrend in October 2020, continue to act as strong support. Market talk projects that the world’s most consumed cooking oil may continue its slide towards RM3,000 to RM3,200 a tonne by September this year, driven by surging supplies from Indonesia.

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The upward trend line joining lows since May 2020 has been breached and will now act as resistance whenever prices try to break through. In its recent rise, palm oil touched the 50 day moving average at 4,438 and for the next few weeks it should consolidate between a larger range of 3,700 to 5,000 without the intervention of any market-moving events.

But are technicals sufficient to guide volatile movements in agricultural commodities? Demand-supply dynamics have a part to play as well. The world’s production of 7 oilseeds is estimated at 610 million tonnes, up by 33.4 million tonnes for 2023, with supplies expected to pour in during the first quarter of 2023. Ongoing geopolitical crisis will pose constant bullish threat as supply chains look restricted; we should witness some recovery in prices before soybean oil, corn oil and rapeseed oil supplies from the southern hemisphere hit the market in 2023. There is also the possibility of the resumption of the flow of sunflower oil from the Black Sea region in the likelihood of a ceasefire.

The writer is senior commodities manager, Phillip Nova