Edible oil prices to rebound

The edible oil market is back in action, as prices turn volatile and given the extreme moves and views on both sides. All in just two weeks. 

There was a period of consolidation the market went through, from December 2016 to early February. Any sluggishness leads to taking things for granted. While the market believed there would be supply tightness due to the effects of El Niño in Malaysia and Indonesia, the latest supply-demand reports convey something different.

Prices kept rising from mid-July on the El Niño effect on supplies, festive demand from India, West Asia and the Chinese New Year season till early 2017, leading to a bullish bias. At the same time, crude oil recovered from it lows and rising after the Organisation of the Petroleum Exporting Countries (Opec) and non-Opec nations’ deal to cut output. 

After remaining in a bullish range, prices suddenly dropped sharply over the past few weeks, on rising production, benign exports and large crops in South America and India.

Both South America and Southeast Asia’s decision to blend more bio-diesel accelerated prices so sharply that top analysts had to cite that as an excuse to change their bearish views, joining the bullish bandwagon at the top-end. Indonesia was able to consume 2.7 million kilolitres of biodiesel annually. This year, Indonesia aims to increase the consumption target to 4.6 million kilolitres. But, this has been completely pushed off the bullish shelf, as if this does not mean anything to the markets.

What is most interesting is that most players have been taking this price rally for granted, as prices have been rising from mid-2015. The concept of hedging oneself from price risk is definitely catching up in India but nowhere close to what is happening in the Bursa Malaysia Berhad (BMD) or the Chicago Board of Trade. One of the main factors of the recent fall in prices is the huge amount of producer selling in BMD. Most of the top plantations in Malaysia are listed and are very proactively managing price risks to protect margins vis-à-vis their cost of production. Moreover, refineries taking advantage of the near-term supply premiums seem to have been caught on the wrong side and appear to have exited their long positions, as margin calls were triggered in BMD, adding to the wave of selling. Also, post an El Niño event, it is not difficult to assume production will only recover gradually. Present indications are that palm fruit trees are still suffering from the effects of El Niño.

Fundamentals are expected to turn negative but have not done so far. But, knee-jerk reactions like the present one were inevitable, as the fight between bulls and bears in the exchange spilled into trading rooms in India and elsewhere. Crude oil is on the rise and the ringgit continues to remain weak, both supportive for prices. Therefore, the current bleak picture being painted does not look justified and the price fall could make it attractive for buyers who have been on the sidelines so far.

Technically, we expect a retracement higher again towards 2,950-3,000 Malaysian ringgit per tonne levels.

The author is director at Commtrendz Research and a consultant to commodity bourses and corporations in India and abroad