Palm oil drops amid selloff, coronavirus fears

Crude palm oil futures on the Bursa Malaysia Derivatives Exchange retreated 10% near the end of the trading session Tuesday, as funds liquidated positions and fears of the economic impact of the coronavirus outbreak in China hurt global markets.

The benchmark April contract settled Tuesday MR 286/mt down from the last settle at MR 2,575/mt.

S&P Global Platts assessed the CPO FOB Indonesia price at $715/mt on Tuesday, down $50/mt from its last assessment on Friday at 1230 pm SGT (0430 GMT). Similarly, Platts assessed CPO CIF Rotterdam at $750/mt on Tuesday, down $45 on the day.

While the fall was partly attributed to the coronavirus outbreak and its resulting adverse impact on consumer demand for palm oil, a number of market participants cited the liquidation of positions by speculators, as well as the spillover effect of reactionary weakness in wider global markets as complementary reasons for the drastic fall in the futures.

The coronavirus has had an impact but is "far from the right explanation," a Europe-based trader said. The market was too long by a few big players and now funds and plantations are taking profits heavily, the source said.

According to a Malaysia-based producer, "The fall is very targeted and concentrated. I think that some speculators are also selling futures on the BMD to hedge long positions on the Dalian Commodity Exchange. The DCE does not reopen till the 3rd of February, so I expect this sell off to continue to the end of the week."

CORONAVIRUS WEAKENS COMMODITY MARKETS

As new cases globally have risen, commodity prices have tumbled in anticipation of lower demand. Due to the lockdown on Chinese cities and strict travel restrictions out of the country, jet fuel and crude oil demand estimates are expected to be significantly reduced. According to S&P Global Platts Analytics, global jet fuel demand could be lowered by as much as 50,000 b/d to 150,000 b/d in the next two months. The outbreak is anticipated to trim 200,000 b/d from crude oil demand, which would equate to 15% of expected oil demand growth, according to Platts Analytics.

"Other than weaker soybean oil on the CBOT, the general weakness in the energy and other commodity markets has dragged palm oil down today," said a Malaysia-based producer. "Many have been holding long positions on the various exchanges, and will liquidate their positions when they see the futures falling so much. I personally do not think that the underlying fundamentals have changed enough to warrant such a drastic fall. I think it is purely fear sparking fear that is driving this selloff."

Market participants reacted with surprise when trading was halted as the futures hit limit down.

"I do not think has happened since 2008," said an Indonesia based producer.

On the technical front, Anilkumar Bagani, research head of Mumbai based consultancy Sunvin group said, "The gap lower opening had resulted in a crucial break below MR2,800/mt, which was the neckline of head and shoulder pattern in daily chart and as a result a steep fall to MR 2,575/mt was seen."

Another Malaysia-based trader said he "did not expect to see MR 2,575/mt until at least September, reasoning that lower prices in the second half of the year were a result of higher production levels typically seen during that period.

"I thought the futures would close at most MR 150/mt down from the previous settle, but today's close at MR 286/mt less than the previous settle tells me that there is a potential further drop of MR 100/mt ringgit," the trader said. "I expect that market to open gap down tomorrow."