Despite weaker momentum in the month of January, the price of crude palm oil futures (FCPO) in Bursa Malaysia continues to surge on low supply and strong demand. FCPO rose 6.8% in one month, breaking above the resistance level of RM3,880 in February to RM3,955 per metric ton as at 11 February. The price of FCPO is at its highest level in 33 months. The palm oil market once again becomes a hot topic from industry and market players. Number of contracts traded on Bursa Malaysia increased from a daily average of 11,024 contracts in January to 12,424 contracts in the same period in February.

In the month of January, Malaysia’s palm oil output fell 14% compared with December to 1.06 million tons, according to Malaysian Palm Oil Board (MPOB) in its monthly report. In the report, palm oil exports fell 6.2% to 1.21 million tons while palm oil stocks down 12% to 1.42 million tons. The low production in the month of January has prompted price to climb higher in February.

The reversal pattern last month based on the head and shoulder chart pattern did not materialized as the price stayed above the RM3,600 neckline. FCPO continues to stay in the uptrend. The short to long term 30 to 90 day moving averages are still increasing. I was expecting the uptrend to change its course last month because of weak technical indications but the unexpected low palm oil output has caused the price of FCPO to continue to show resilience in the uptrend. After testing the short term 30-day moving average twice in January, FCPO continues its upward rally. The 30-day moving average is currently at RM3,780.

The momentum indicators, which show weakness in the uptrend in January become stronger in the short term following the rally in February. The MACD indicator has crossed above it trigger line, suggesting that the short term up trend is now continuing upwards. The RSI and Momentum Oscillator indicators bounced-off from the middle level showing that the bulls are still in control. However, in the longer term, the uptrend momentum is still weak. The long term divergence between the momentum indicators and the price up trend still exists.

Technically, the price is geared to making newer highs in the short term. Price target is at RM4,100, based on a triangle chart pattern formed since early this year when uptrend consolidated. The Fibonacci expansion from the short term up trend has a price objective of RM4,060. The immediate support level is at RM3,880, the previous resistance level and if the price breaks below this support level, price may move into a correction more again and find support at the uptrend support level of RM3,700. This means that long as the price stays above the support level of RM3,700, the uptrend may continue.

The price up trend should be able to be supported as long as the fundamental figures of supply and demand fall within the expectations. The month of February normally has the lowest figure for palm oil output. With this and continuous growth in demand, the price may be supported fundamentally. In the recent export data, Malaysia’s palm oil exports rose significantly on month. SGS (Malaysia) Bhd estimated a rise of 28.5% of 432,000 tons for the February 1 to 10 period. Intertek Agri Services Sdn Bhd estimated a rise of 45.7% on month at 437,480 tons.

With the technical and fundamental indicators, there is a high chance of price moving higher and technically set to test RM4,100. There is also a possibility of price to even climb to historical highs. With the current bullish price data, my longer term forecast for FCPO price forecast for the next 6 months is revised to RM3,700 to RM4,100 in the next six months, from RM3,600 to RM3,800. Stronger Malaysian Ringgit against the US dollar may also help the FCPO up trend.
 

 

 

 

 

 

 

 

 

 

 

 

 

FCPO daily chart as at 11 February 2011. Charted by Benny Lee using NextView Advisor Professional