Crude palm oil uptrend here to stay

SINCE touching an all-time high in May 2021, the crude palm oil (CPO) market has shown no sign of slowing down. Prices broke through, setting new record highs for most of the last 6 months in a rally that was driven by a combination of fundamental factors.

Firstly, industry data continues to paint a bearish picture for palm oil supply as production inefficiencies remain in the industry due to Covid-19. This has caused palm oil output in the second largest producer, Malaysia, to drop to a 5-year low despite the market seeing sustained record prices.

As the palm oil sector used to depend mostly on foreigners, the on-going cross-border and cross-state movement restrictions have severely crippled the industry's labour force and impaired harvesting operations.

Secondly, policy announcements by major palm oil producing and consuming countries also helped to lift CPO prices further. Earlier in late January, top producer Indonesia issued a new regulation that requires export permits for all palm oil products, raising fears of supply disruption to the rest of the market.

Later, India announced a reduction of its CPO import tax from 7.5 per cent to 5 per cent in order to contain local prices. The move was seen as a potential boost to demand and provided support to CPO prices.

Thirdly, the rally in crude oil prices has also provided uplift for crude palm oil prices as it is used as biodiesel feedstock.

Technical outlook

Apart from the retracement in June 2021 when it first broke a new high, CPO prices (as seen by the rolling third contract month of Bursa Malaysia Derivatives crude palm oil futures) have mostly remained in an uptrend. This is also in line with the prevailing fundamental situation.

Key technical indicators have acted as support for the contract, as it can be seen bouncing off the 100-day and 200-day simple moving averages on the higher time frame and the 20-day simple moving average on the lower time frame. The contract is also seen to be in an ascending channel that started forming since May 2021.

In the near term, we may expect a retracement as the contract is currently near the channel's upper trend line which acts as resistance. In the mid term and long term, unless market fundamentals indicate a significant improvement, we can expect the uptrend for CPO prices to continue.

In this case, we can expect support to come in at the 20-day, 100-day and 200-day simple moving averages at the channel's lower trend line, as well as at key support price levels including 5,291 ringgit (S$1,701) per tonne (low of Feb 9 2022), 4,912 ringgit per tonne (low of Jan 17, 2022) and 4,245 ringgit per tonne (low of Dec 16, 2021).

• The writer is commodities manager at Phillip Nova