Crude oil-linked agro commodities fall sharply, Guar, CPO lead decline

CPO is used to make bio-fuels and is influenced by the movement in crude oil; Guar gum fell because it is used in fracking, a method of extracting shale gas

Agricultural commodities followed the path of equities today, with guar seed and gum prices posting sharp declines brought on by a signifcant bearish trend in crude oil. Crude palm oil displayed a similar sentiment, as a lot of the demand for this commodity comes from bio-fuel makers, and its price is influenced to some extent by the movement in crude oil. In fact, practically everything else, including Chana and a range of spices traded in the derivatives segment of NCDEX, was down today.

Guar gum, guar seeds, crude palm oil, and other edible oils like soy bean shed between 1.5 per cent and 4 per cent today.

Crude oil prices have a direct correlation with several agriculture commodities such as edible oils (Crude Palm Oil or CPO, Soy oil) and Guar gum. “With Brent Crude shedding nearly 50 per cent since early January, edible oils, which are used in bio-fuel blending, have lost their sheen  considerably. On Boursa Malaysia, CPO hit the lower circuit of 10 per cent during the first half of today’s session. On MCX it closed lower by about 3 per cent. Guar gum fell because it is used in fracking, a method of extracting shale gas that involves pumping pressurised gas into the ground," explained Ravindra Rao, VP and Head of Commodity Research at Kotak Securities.

With the fall in shale oil prices, gum is neither that attractive nor viable at high prices. Guar gum for delivery in April was also pinned to the lower circuit today, and guar seed followed suit.

Rao added, “In this uncertain situation, where it becomes difficult to predict the future direction of crude oil after a 30 per cent fall in a day, we are advising clients to stay away and wait till the market stabilises. It is always safe to stay on the sidelines when there is lot of panic in the market, as happened today.”

Margin calls on brokers to meet the shortfall in other commodities and assets were seen in agro commodities as well, as prices of most fell sharply. Brokers were seen selling whatever they could across markets to meet margin calls in both, crude oil and equities. Even spices were lower following the rout.