Business Times CPO futures -- cautious trade ahead of MPOB data

OBSERVATIONS: The Kuala Lumpur CPO futures market sprung a bull trap in early trade last week, catching short position holders off guard. And as the short position holders scurried to cut losses by liquidating their money-losing short positions, the short-covering frenzy lifted this market to a six-month high.

The actively-traded June 2009 contract soared to an intra-week high of RM2,185, settling at RM2,165 a tonne, up RM175, or 8.79 per cent, over the week.

The short-covering frenzy was evidenced by the notable contraction in the total open interest position last Monday through Wednesday, when the total number of open contracts shrunk from 89,634 open contracts to 88,652, a disappearance of 982 contracts as the active June 2009 jumped from RM1,970 to RM2,070 a tonne.

Renewed speculative buying interest was sparked by talk doing the market rounds - or investor conviction - that a recovery in export demand coupled with a weather-related crimp on production would lead to a further reduction in stocks, which at end-February stood at 1,561,161 tonnes.

The country has experienced heavy rainfall in past weeks. Kuala Lumpur's Central Business District suffered traffic gridlocks due to flooding, which has probably also hampered the harvesting of palm oil fruits.

Buying interest based on speculation over a robust recovery in exports could be premature, if the latest - and spotty - export estimates are any guide.

Societe Generale de Surveillance sees March exports of palm oil jumping by a robust 63,000 tonnes, or 5.39 per cent, to 1,223,716 tonnes.

Intertek Agri Services' (IAS) estimate for March exports, however, was only 1,163,008 tonnes, up a mere 5,531 tonnes, or 0.47 per cent, compared to that for February.

Conclusion: This market, based on its position last Friday above the upper Bollinger Band, was in an extremely overbought position and a technical pullback in a distinct possibility in early trade this week,

Although still in bull mode, trading could turn cautious ahead of the Malaysian Palm Oil Board (MPOB) report as much, if any, good news may have already been factored into prices. The MPOB report on March trade data and end-month position of stocks is due out this Friday.