Canada Markets

Palm Oil Showing Signs of Technical Weakness

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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Malaysian crude palm oil closed lower for the eighth straight day on Wednesday, after showing a bearish gap lower in Tuesday's trade, while breaking through both its 200-day moving average as well as retracement support. Stochastic momentum indicators (middle study) are moving into oversold territory of the chart, while the lower study indicates weakening spreads and a sign of a weakening bullish sentiment among commercial traders. (DTN graphic by Nick Scalise)

Despite the negative impact of El Nino to Malaysian palm oil production which resulted in crude palm oil stocks hitting a five-year low in the month of May, a number of bearish fundamental factors are currently weighing on the market.

A combination of increasing production along with falling exports weigh on this market at present. Recent reports have shown May production at 1.36 million metric tons, up 4.9% from the previous month. Seasonal trends suggest that production will continue to grow over the upcoming months. On Wednesday, Malaysian exports over the June 1-15 period were estimated to be down 3.4% from the same period last month.

Prices are also facing the impact of a higher local currency, the Malaysian ringgit. Since June 2, this currency has gained roughly 1.8% against the U.S. dollar, weighing on prices. There has also been a negative reaction to news that the Malaysian Palm Oil Board will increase a tax on exports from 5.5% to 6%, which will have an adverse effect on exports.

Other fundamental factors include competition from soybean oil, which has fallen 10% on the July contract between the April 21 high until Wednesday's close. U.S. reports Wednesday included May crush data which showed crush volumes increased in May from the previous month to levels above expectations, weighing further on the vegetable oil market as crushers focus on the demand for meal. NYMEX crude has also fallen from a $51.67/barrel high on June 9 with the nearby contract trading at $47.49/barrel Wednesday. As well, the Malaysian Palm Oil Council reports that China has released government stocks of rapeseed oil to the market which has eroded demand for competing oils.

After reaching a high of 2,793 ringgits/metric ton on March 29, the highest level reached since March 2014, the price as seen on the attached continuous active chart has fallen 14% to Wednesday's low of 2,399 ringgits/mt which is almost a five-month low. This move includes losses seen in each of the past eight sessions, with Wednesday's loss of 82 ringgits appearing to be the largest one-day move lower since October 2012 while also breaking through key support levels.

Tuesday's trade resulted in a bearish gap lower, with Tuesday's high being six ringgits below the previous day's low. Wednesday's trade saw further selling push the nearby August contract below the 200-day moving average on the continuous chart for the first time since September 2015. As well, Wednesday's trade saw the nearby price push below the support of the 38.2% retracement of the move from the August 2015 low to the March 2016 high at 2,438 ringgits, opening the door to a further slide to the 50% retracement at 2,328 ringgits.

The lower study on the attached chart also points to weakening spreads, a sign of commercial selling which is weakening the inverse which has governed trade in recent months.

Wednesday's price has already ended below estimated ranges suggested to govern trade over the month of June as seen in recent reports, while some palm oil analysts are bravely calling for higher prices in the June/July period.

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

Follow Cliff Jamieson on Twitter @Cliff Jamieson

(ES)

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