CPO: A Choice Between Volume & Price

These days when one reads about CPO outlook, the thing that comes to mind immediately is: Having the cake and eating it. The reason we are here is simply because the industry has crossed over its tipping point where supply is more than demand. In fact, many industries are experiencing the same demand-supply dynamic, thanks to cheap & easy money.

What we have in the palm oil sector is continuous increase in output as more and more land is cultivated and then comes online. So, the industry needs two things to bring this market into equilibrium, however briefly. It needs additional/new demand which lately seems to come mostly from the government such as policies on B10 biodiesel or biodiesel mandate. It could certainly benefit from a drop in supply or output, which would have to come from seasonal factors/events such as monsoon floods or wintering effect or cyclical weather phenomenon such as El Nino. The supply inhibitors have minimal effect while government policies are both costly & problematic as they tends to create winners & losers in the economy. Soon, palm oil industry's super profit will be a thing of the past and everyone will have to settle for normal profit, which may happen in the next few years.  My only hope is that we won't have to go through a period of losses before reaching that destination.

Meanwhile, we can see that CPO had a decent rally last week. We started out with an expanding triangle pattern, ABCD from October 2014 to December 2014. Lately, the prices are no longer reaching for the upper line nor the lower line. The pattern may be reshaped into a diamond formation. Until a breakout, this sideways trading will continue within a range of RM2100 & RM2400.

If you like to read about the fundamental outlook for CPO, go here. In short, CPO prices are expected to be good for the next few months as production is expected to decline due to lower output as a result of the wintering effect. In the second half of the year, prices are expected to drop as the wintering effect dissipates. Crude oil prices are expected to remain weak at USD50-75 and this is expected to act as a drag on the prices of CPO. 

 
Chart 1: CPO's weekly chart as at Feb 9, 2015 (Source: iFS.marketcenter.com)

I attached below the charts of Plantation index as well as FBMPALMOIL. Both indices have broken their respective uptrend line in August last year. These indices rallied to test but failed to surpass their respective intermediate downtrend line.


Chart 2: FBMPOALMOIL's weekly chart as at Mar 5, 2015 (Powered by ShareInvestor.com)


Chart 3: Plantation's weekly chart as at Mar 5, 2015 (Powered by ShareInvestor.com)