Canada Markets

Crude Palm Oil Market Faces Pressure

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The December crude palm oil contract traded on the Bursa Malaysia Exchange rallied 29% from the Aug. 26 low to the Sept. 29 high, although is showing signs of breaking down this week on the daily chart. The middle study shows short-term momentum indicators trending lower after a bearish crossover in overbought territory, while the lower study shows the move lower taking place with increasing volume. (DTN graphic by Nick Scalise)

The November canola contract has struggled with resistance so far this month, with advances over psychological resistance at $480 per metric ton as well as attempts to breach the contract's 50-day moving average met with resistance. Ahead of Friday's USDA report, which may set the direction for soybeans, the November contract is trading sideways within last week's trading range while trading near the lower end of this week's range. The canola market is not seeing a great deal of support from global oilseed and vegetable oil markets this week.

As seen on the attached chart, the benchmark December crude palm oil contract traded in Malaysia has seen heavy selling in the last three sessions after posting a substantial 29% move from the Aug. 28 low to the Sept. 29 high. The weakness was seen starting on Tuesday with a bearish outside trading day, which is circled on the chart, with that day's trading range being both higher and lower than the previous day while the close was sharply lower.

Time will tell if this market has further downside potential, which will weigh further on competing oilseeds and vegetable oil markets. Thursday's trade was just barely below the contract's 20-day moving average (red line), which is the first time this has happened since Sept. 2. As well, trade on Thursday came close to a test of support at the 38.2% retracement of the move from the August low to the September high, found at 2,249 ringgits, or the horizontal red line. One further level of support which is close to being tested is found at 2,248 ringgits, which is the lower-end of a bullish gap-up trade seen on Sept. 25.

Increasing volume in daily trade is also fueling the current move lower, as seen on the lower study. The three-session sell-off is seen taking place on increasing volume, which may hint at a continued test of support.

On Wednesday, the Malaysian Palm Oil Council heard from a leading analyst in that industry who suggested that palm oil production is expected to fall in the next 18 months, attributed to limited use of fertilizer and excessive smoke over Indonesia and Malaysia, which is limiting sunshine. The supportive tone to this message seems to be lost with concerns of sluggish demand reported by Dow Jones and concerns surrounding economic weakness in China. The current drop in production also seems to be underscored given an "underlying cycle," which will see new trees mature and lead to a "sizeable" increase in production over the next three to five years.

September's Oilseeds: World Markets and Trade released by USDA showed how the combination of palm oil and soybean oil make up nearly two-thirds of the global vegetable consumption in 2015/16 given ample supplies. The balance of the competing oils, such as canola (rapeseed) sunflower seed and cottonseed, must fight over the remaining one-third of global demand, while lower supplies of these oils have resulted in price premiums for these oils which makes them less competitive with soy and palm oil.

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Cliff Jamieson can be reached at cliff.jamieson@dtn.com

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(AG)

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