Following a prolonged period of sideways consolidation, the main palm oil futures contract has experienced a breakout to the upside today. As of the afternoon close, the main contract rose 2.85% to settle at 9,515 yuan per ton, breaking above the upper boundary of its previous trading range. What are the key drivers behind palm oil's recent movement, and can the upward trend continue post-breakout?
Recent Key Drivers:
Rising crude oil prices have provided a boost to sentiment in the vegetable oils market. Recent escalations in the US-Iran conflict, with threats targeting critical infrastructure from both sides, have led to renewed strength in oil prices. This, in turn, has bolstered expectations for palm oil demand as a biodiesel feedstock.
Malaysian palm oil production has shown a month-on-month decline, creating a discrepancy with market expectations. Data from the Southern Peninsula Palm Oil Millers' Association (SPPOMA) indicates that for the period of July 1-20, Malaysian palm oil yield decreased by 56% compared to the previous month. While the oil extraction rate increased by 0.15%, overall production fell by 0.77% month-on-month, contrasting with market expectations for increased output.
Import expectations from India have strengthened. As the world's largest palm oil importer, India is expected to see its edible oil imports rise from July through October ahead of the peak festive season demand. This anticipated increase is due to slowing domestic supplies as crushing of soybeans and rapeseed decelerates, potentially providing demand-side support for palm oil prices.
Full implementation of Indonesia's B50 policy is expected to tighten supply. Indonesia has reported success with its B50 palm oil-based biodiesel mandate. The full execution of B50 is projected to increase crude palm oil consumption from 15.2 million tons to between 16.3 and 17.0 million tons, leading market participants to anticipate a tightening of Indonesian palm oil supplies.
Overall, current support from crude oil prices and strong supply-demand expectations are providing short-term support for palm oil prices. However, it is important to note that the market remains in the traditional peak production season in key growing regions, with inventory pressures persisting. The realization of El Niño-related production reductions tends to exhibit a lag. Domestically, the market is in a seasonal demand lull, with procurement driven primarily by essential needs, limiting its capacity to absorb supply. Attention should be paid to the price spread between domestic and international markets. Investors should monitor uncertainties related to weather in producing regions and geopolitical factors. From a technical perspective, support near the 60-day moving average on the daily chart for the main contract warrants attention. Chasing the rally carries risks and requires a cautious approach.
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