Factors affecting crude palm oil (CPO) prices
While crude oil is a widely traded commodity around the world, its less popular and edible relative, crude palm oil (CPO) had also been particularly popular in the Southeast Asia region with the fluctuating palm oil prices.
What is crude palm oil?
In short, crude palm oil (CPO) is a plant-based oil derived from the pulp of the fruit from oil palms. Unlike its yellowish-black relative, CPO takes on a reddish colour due to the said fruit from which it is extracted. Little goes to waste for the fruit of the oil palm tree with the kernel also being used to produce palm kernel oil. Known also as vegetable lard, palm oil uses expand beyond cooking, as it has a wide variety of uses, including being utilised in toiletries and other food products.
Vast amount of land, particularly in Southeast Asian countries such as Indonesia and Malaysia, had been dedicated to oil palm plantations for CPO cultivation. However, this had also led to deforestation of habitats which is home to many endangered animals, drawing backlash.
Why is palm oil valuable?
Over and above the efficiency in having higher than average output per hectare compared to other vegetable oils, this high-yield crop is also the most produced edible oil according to 2015 statistics.1 Given the growing global population, this had only seen to continuous increasing demand. Besides cooking purposes and food products, palm oil can also be found across products such as cosmetics, toiletries (including shampoo and soap) and in biodiesel, among other uses. The versatility of palm oil is perhaps the key contributor to its value, hence the growth of the palm oil cultivation industry.
One would note that the palm oil industry is also responsible for the livelihood of a large number of people with the Ministry of Environment and Forestry in Indonesia, the top producer of palm oil, reporting 8.4 million people employed within the industry.2
Top 5 palm oil producing countries
The majority of palm oil production takes place in Southeast Asia, with Indonesia being the top producer and accounting for approximately 60% of the global supply.
| Country | Production (in metric tons) |
| 1. Indonesia | 36,000,000 |
| 2. Malaysia | 21,000,000 |
| 3. Thailand | 2,200,000 |
| 4. Colombia | 1,320,000 |
| 5. Nigeria | 970,000 |
Source: Worlddatlas3
Factors affecting crude palm oil (CPO) prices
Supply
As with any plant-based fuel, the standard supply and demand plays a key role in determining the price for CPO. The majority of the palm oil plantations resides in the tropical Southeast Asian countries of Indonesia and Malaysia that oftentimes find fluctuating weather patterns affecting the yield. During periods of dry spells or heavy rainfall resulting in flooding, palm oil production would be affected and subsequently prices as well.
Demand
Asia regions such as China and India are the key importers for palm oil, together accounting for a quarter of the global consumption.4 These are also countries that are expecting continued population growth, a key source for demand growth for CPO. On the other hand, import policies and regulations by importing countries may serve as trade barriers, thereby affecting the demand as well.
Environmental impact of palm oil production
According to the World Wildlife Fund, around 90% of the world’s oil palm trees are grown across Malaysia and Indonesia, islands with the most biodiverse tropical forests found on Earth. To make space for the oil palm plantations, acres of rainforests continue to be cleared which in turn endangers the rich biodiversity the habitats host. This saw to significant backlash amongst environmental groups and a public shift from many of palm oil products. That said, since 2012, the UK government had also addressed the palm oil problem by committing towards a 100% sourcing from sustainable sources.
Substitution by other oils
In light of the abovementioned environmental concerns, palm oil substitutes have also grown in popularity. Some of these such as olive and coconut oil can be seen substituting for the various uses that CPO had been put to.
How to trade crude palm oil
In the chart below, CPO prices can be seen stuck to a downtrend for the majority of 2019, before firmly breaking out of the channel into a strong uptrend. Supply had been the key factor driving the fluctuation for CPO prices in the period, though the macro picture played a part as well, with weak crude oil prices weighing on this biofuel. As can be seen, CPO prices do make for good trend trading and technical analysis can be applied here to recognise trend reversals for trade.
IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.
The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.
Please see important Research Disclaimer.
Speculate on commodities
Trade commodity futures, as well as 27 commodity markets with no fixed expiries.1
- Wide range of popular and niche metals, energies and softs
- Spreads from 0.3 pts on Spot Gold, 2 pts on Spot Silver and 2.8 pts on Oil
- View continuous charting, backdated for up to five years
1In the case of all DFBs, there is a fixed expiry at some point in the future.
Turn knowledge into success
Practice makes perfect. Take what you’ve learned in this commodities strategy article, and try it out risk-free in your demo account.
Ready to trade commodities?
Put the lessons in this article to use in a live account. Upgrading is quick and simple.
- Deal on our wide range of major and niche commodities
- Protect your capital with risk management tools
- Enjoy some of the best spreads on the market – Spot Gold from 0.3 points
Inspired to trade?
Put the knowledge you’ve gained from this article into practice. Log in to your account now.
