THE prices of the benchmark active Malaysian crude palm oil futures contract remained ensnared in a tight range throughout the week starting Feb 19, weighed down by a medley of conflicting fundamental data. Weak exports and decreased production during this period painted the picture of cautious consolidation within the commodity market.
From a technical standpoint, a localised triangle chart formation has emerged, where the slopes of local highs and lows converge, symbolising the ongoing tug-of-war between bulls and bears. Any decisive breakout in either direction is poised to trigger a surge in trading volume, with speculators and physical hedgers alike rushing in to capitalise on or hedge against the potential market volatility.
The convergence point signals a crucial level at RM3,850 per metric tonne. A decisive breach above this threshold, marked by a sustained closing price exceeding RM3,900 per metric tonne for at least two consecutive sessions backed by robust trading volume, could propel prices towards the RM4,000 mark. Prices will encounter initial resistance at this level before setting sights on the subsequent barrier at RM4,200. Conversely, a decisive breach below this threshold, with sustained closing prices below RM3,800, could trigger a downward spiral, potentially descending to RM3,600 per metric tonne, where significant support awaits.
Short-term market dynamics, including demand-supply fundamentals and currency fluctuations listed below, are expected to dictate the resilience of support and resistance at these pivotal price levels:
Currency dynamics: The depreciation of the Malaysian ringgit against the US dollar over the week has heightened market sensitivity, with the currency flirting dangerously around historic weakness levels. A weaker ringgit typically enhances the attractiveness of Malaysian palm oil to foreign buyers, thereby bolstering demand and supporting prices.
Export, production, and stockpile dynamics: Export figures for the first 20 days of February, though indicating a decline compared to the previous month, are anticipated to improve when the market regains confidence in Chinese macroeconomic conditions. Moreover, short-term local demand is likely to surge during the upcoming holy month of Ramadan. This will potentially reduce the already low Malaysian stockpile. Long-term production dynamics may be influenced by factors such as the transition from El Nino weather conditions to that of La Nina expected in mid-2024. This could possibly improve palm cultivation while the delayed replanting of aged trees due to the Covid-19 pandemic is probably keeping yields subdued.
Edible oils complex dynamics: The relationship between palm oil and its edible oil counterparts plays a pivotal role in influencing palm oil demand. Current subdued palm oil prices, partly attributed to the decline in soybean oil prices, may witness a reversal in the near future, especially with technical indicators of US soybean oil futures hinting at a potential recovery. US soybean oil futures prices have been threading dangerously near mid-2023 lows, with momentum indicators pointing to a bullish divergence. Nevertheless, though unlikely, there still lingers the risk of a significant price drop should prices fail to hold from fundamental triggers. Long liquidations of bargain hunters at current levels could force prices south quickly.
In conclusion, amid these near-term price-moving factors, a bias towards upward movement is discernible, with prices poised to retest the RM4,000 resistance level within this week.
The writer is commodities strategist at Phillip Nova
