The front-month October palm oil contract on the Bursa Malaysia crossed the MR5,000/mt mark Oct. 6 on short covering activities.
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At 1220 Singapore time, the contract was trading at MR5,082/mt, with benchmark December at MR4,845/mt.
"Production issues have been on the forefront for the whole of this year, but that has been priced in. The price action on the futures today is purely technical," said a trader.
"Fundamentals cannot explain this. We didn't even see these levels when end stocks were at 1.2 million mt," said the same source.
"I am expecting a correction as stop losses will be triggered for those holding short positions, and there will be a significant number of margin calls and perhaps forced liquidations."
"I think the market will hold and the correction will likely happen after the Dalian [Commodity Exchange] opens on Friday though," said another trader who expects palm olein futures on the DCE to open limit up at 10% higher tracking strength in the BMD.
Another trader with a more conservative view agreed that futures on the DCE would open gap higher, but around 5%-6% higher based on historical correlations between the futures on the DCE and BMD.
"The BMD is up only 4% this week, the rise has been incremental. Prices started rising on expectations of lowered production, but technicals took over and short covering has pushed the futures to this point. Unless there is another huge jump in the BMD today, I think Dalian futures are likely to open 5%-6% higher, maybe 7% on a bullish note," said this source.
While the labour shortage in Malaysia has been quoted as the source of the production issues, a trader said it was difficult to identify the exact reason for lower production.
"There is no doubt that these prices are the result of a production crunch, but flooding in parts of Malaysia, as well as COVID-19 related logistical issues are also to blame, not just the labor shortage," said the same source.
"The government is allowing 32,000 foreign workers into the country by mid-October, but I expect the result of this can only be seen from January 2022. They will need to sort out work permits, vaccinations and many other administrative issues. I think the peak production would be in October this year, but by the time the workers are able to function in the plantation, we will be in the low production season anyway," the source added.
Most analysts and industry watchers have revised their initial estimates of Malaysian production downwards from around 19.4 million to 19.6 million mt earlier this year, to around 18.4 million mt to as low as 18 million mt.
Higher energy prices have also provided some strength to veg oil prices, due to their usage in biofuels, but sources cautioned that the Po-Go spread, or the spread between palm oil and gasoil still remains at levels unviable for biodiesel production. As of Oct. 5, the Po-Go spread was at $434.12/mt, while a spread of minus $150/mt is considered viable for discretionary blending.
"Crude oil really needs to be at around $120/b to $130/b to the biodiesel story to be attractive again. I will admit that the bullishness in energy prices as well as soybean oil has lent some strength to palm oil, but the main push for these high prices has been the lowered production," said this source.
According to S&P Global Platts data, CPO FOB Indonesia for November was assessed at $1,250/mt on Oct. 6, while CPO CFR West Coast India was assessed at $1,280/mt.