Crude Palm Oil Futures: Strong downwards momentum may push the price of FCPO lower.

The weakening demand for food and oil and record levels inventory have caused price of crude oil and crude palm oil to decline. The price of crude palm oil futures 3rd month contract (FCPO), which was in a sideway correction mode since April this year, has started to be dominated by bears. Average price when it was in a correction was about RM 3,570 per tonne and as at 28 July, the price declined heavily for the past two weeks to close at RM3,001 per tonne. This is a 16% decline in two weeks.

The price is expected to remain sideways or decline until inventories start to deplete and with fresh buying from China and India which are main importers of crude palm oil. With the decline in the price of crude oil, demand of bio-diesel is expected to come off a little.

Technically, the price of FCPO is currently in a down trend after it broke the support level of the correction triangle pattern at RM3,500. The triangle pattern (See chart below) was formed about four months ago. With the aggressive decline, the moving averages, both short and long term have started to decline and this signals the beginning of the down trend. Furthermore, the price broke below the long term up trend line which was formed since August 2006 (See TL1 on chart below).

The triangle pattern has a downside target of RM2,850. With the strong momentum downwards, this target may be achieved in the next few days. A small technical rebound is expected to occur once the target is achieved. However, more downside is expected as the longer term correction is expected to end at RM2,300.

Momentum indicators continue to support the current down trend. MACD has gone below zero and this means that the trend is dominated by the bears, so does the RSI indicator, which has gone below the 30 level. The strong downwards momentum may push the price of FCPO lower.


CPOF 3rd month contract continuous weekly chart as at 28 July 2008. Chart from NextView Advisor

Sentiment for FCPO is weakening and this can be seen in declining trading volume and Open Interest. The average weekly trading volume was at about 43,000 contracts in March and April. Currently the average weekly trading volume is about 30,000 contracts. Therefore the decline in weekly trading volume is about 30%.

Therefore, the price of CPOF is expected to decline with a longer term target at RM2,300 per tonne with some support expected at RM2,850. Resistance is at broken long term up trend line (TL1) which is currently at RM3,300.


Commentary and Analysis by Benny Lee