Foreign Investors Lured by Palm Oil’s Wild Ride

Foreign investors currently account for 40% of trading in Malaysian palm oil futures, compared with 25% in 2010, Bursa Malaysia relates to the Wall Street Journal. This is indicative of global interest in trading in palm oil increasing as a result of growing consumption, demand, and its correlation to other commodities on the market.

Between the years of 2010 and 2014, global palm oil production increased by 20% and consumption rates paralleled this growth, according to the U.S. Department of Agriculture (USDA), increasing market competition with other edible oils such as rapeseed and soyoil.

Overall trade in Bursa’s global benchmark crude palm oil futures hit 10 million lots last year – an increase of two and a half times that of 2010 volume. And in the first two months of 2015 alone, trade hit almost 2 million lots.

Participation from U.S. and European traders grew after the CME Group acquired a 25% stake in Bursa Malaysian Derivatives in 2009, allowing the Malaysian derivatives to be traded on the Globex trading platform. However, foreign investors are also attracted by the fact that palm oil and soyoil trade in a relatively correlative fashion as the two are substitute products for each other, making palm oil an indicator of the soyoil market. Both trade in correlation to crude oil, as palm oil is used in its alternative, biodiesel. These correlations, and palm oil’s recent volatility also give traders the opportunity to seize advantage when these commodities occasionally trade out of sync.