Technically Speaking
Darin Newsom DTN Senior Analyst

Friday 05/30/14

Malaise in Palm Oil

As so often happens, a news article popped up on the radar of the DTN newsroom, talking about the rise in palm oil prices. According to the piece, increased biodiesel demand from Asia and the effects of El Nino were going to lead to higher prices down the road. My immediate response was two-fold: first, the headline stating prices have been driven higher didn't fit the tone of the story talk about what could be; and second, Malaysian palm oil futures recently went to fresh 7-month lows.

Source: DTN ProphetX

Take a look at the long-term monthly chart for Malaysian palm oil. Since posting a high of MYR2,950/ton this past March, the nearby futures market has fallen back to a late May price of MYR2,425/ton. Note a couple of things about those prices: the high was a test of secondary resistance at MYR2,848, a price that marks the 50% retracement of the sell-off from MYR3,655 (high from April 2012) through the low of MYR2,040 (December 2012). Also, the May low of MYR2,426 is approaching support at MYR2,343, the 67% retracement of the uptrend from the December 2012 low through the March 2014 high.

Given all this information, what would seem to be the next move in Malaysian palm oil futures? Monthly stochastics show that the last major signal was a bullish crossover established at the end of May 2013. The recent sell-off did not coincide with a crossover above the overbought level of 80%. This indicates the ongoing sell-off is part of a consolidation phase, with another rally expected. After a solid test of support at the MYR2,343 level, the nearby futures contract could find renewed buying interest to eventually lead to a rally that tests resistance between MYR3,020 and MYR3,117.

As for the fundamentals of the market, the article wasn't completely off track. The nearby spread is at par, having seen the recent inverse erased since the peak in March. However, a look at the forward curve for the futures market shows a slight inverse from the July contract through the October. At that point the forward curve moves into a small carry through the May 2015 contract.

Analyzing these price relationship one can conclude that the commercial outlook is indeed bullish through at least this coming fall. Therefore, it is possible that increased Asian biofuel demand and a potential weather related decrease in supplies could be the catalyst for the move back to an uptrend that the monthly chart is showing. It's just a bit early to say it either or both are a given.

To track my thoughts on the markets throughout the day, follow me on Twitter:\DarinNewsom

Posted at 8:40AM CDT 05/30/14 by Darin Newsom
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