MARKET DEVELOPMENT
Current Uptrend in Palm Oil Price Will be Shortlived
Current Uptrend in Palm Oil Price Will be Shortlived
21/09/2016 (The Star) - The current bullish trend of crude palm oil (CPO) prices is being supported by the low inventory levels of palm oil, but this uptrend will be shortlived, say market analysts.
They expect the potential increase in production and further narrowing of the CPO price discount to soybean oil to undermine CPO, which entered a bull market last month.
CPO prices have since rebounded by over 20% from a low of RM2,188 in July.
As at 5pm, the CPO futures contract for December rose by RM58 to RM2,700 per tonne.
Kenanga Research said in its report: “While low inventory is supportive of CPO prices, this could be negated by higher CPO spot prices, which appear to have softened demand in price-sensitive countries such as India and China in early September.”
For September, the research unit expects local palm oil stocks to stay flat at 1.48 million tonnes.
Production this month will likely increase to 1.82 million tonnes, which is on track for a seasonal peak in the October-November period, while exports are expected to trend downward to 1.61 million tonnes after restocking by China in August.
Furthermore, the high CPO spot prices will deter price-sensitive markets such as China, India and Pakistan and increase the preference for soybean oil by these countries.
“In the mid-term, we maintain our bearish view on CPO prices in view of a continued production uptrend until the middle of fourth-quarter 2016 and strong expectations of a US rate hike in the coming months.”
As a result, the research unit expects CPO prices to remain volatile in the short term, with a wide second-half 2016 trading range of RM2,500 to RM2,900 per tonne, assuming a soybean oil premium of US$20 per tonne and diesel discount of US$180 per tonne.
“Our 2016 CPO price forecast is maintained at RM2,400 per tonne for now, although with an upside bias in our upcoming fourth-quarter 2016 strategy review, in consideration of supportive prices due to below-average supply recovery.”
With CPO prices expected to remain volatile in the mid-term, Kenanga Research believes Kuala Lumpur Kepong Bhd holds less downside risk, given its big cap status and integrated operations.
AffinHwang Capital, meanwhile, said: “The price uptrend is positive but the soybean oil premium has narrowed.”
Spot prices for CPO have averaged at RM2,499 per tonne in the first eight months of 2016.
“If the current trend continues, then CPO prices may average between RM2,500 and RM2,600 per tonne.
“The strength of the rebound in yields and sustainability of the strong month-on-month export growth will have a bearing on the price trend,” it added.
The soybean oil premium over CPO has also narrowed to around US$84 per tonne after the US Department of Agriculture raised its forecast soybean production for 2016-2017 to a new record high of 114.3 million tonnes.
They expect the potential increase in production and further narrowing of the CPO price discount to soybean oil to undermine CPO, which entered a bull market last month.
CPO prices have since rebounded by over 20% from a low of RM2,188 in July.
As at 5pm, the CPO futures contract for December rose by RM58 to RM2,700 per tonne.
Kenanga Research said in its report: “While low inventory is supportive of CPO prices, this could be negated by higher CPO spot prices, which appear to have softened demand in price-sensitive countries such as India and China in early September.”
For September, the research unit expects local palm oil stocks to stay flat at 1.48 million tonnes.
Production this month will likely increase to 1.82 million tonnes, which is on track for a seasonal peak in the October-November period, while exports are expected to trend downward to 1.61 million tonnes after restocking by China in August.
Furthermore, the high CPO spot prices will deter price-sensitive markets such as China, India and Pakistan and increase the preference for soybean oil by these countries.
“In the mid-term, we maintain our bearish view on CPO prices in view of a continued production uptrend until the middle of fourth-quarter 2016 and strong expectations of a US rate hike in the coming months.”
As a result, the research unit expects CPO prices to remain volatile in the short term, with a wide second-half 2016 trading range of RM2,500 to RM2,900 per tonne, assuming a soybean oil premium of US$20 per tonne and diesel discount of US$180 per tonne.
“Our 2016 CPO price forecast is maintained at RM2,400 per tonne for now, although with an upside bias in our upcoming fourth-quarter 2016 strategy review, in consideration of supportive prices due to below-average supply recovery.”
With CPO prices expected to remain volatile in the mid-term, Kenanga Research believes Kuala Lumpur Kepong Bhd holds less downside risk, given its big cap status and integrated operations.
AffinHwang Capital, meanwhile, said: “The price uptrend is positive but the soybean oil premium has narrowed.”
Spot prices for CPO have averaged at RM2,499 per tonne in the first eight months of 2016.
“If the current trend continues, then CPO prices may average between RM2,500 and RM2,600 per tonne.
“The strength of the rebound in yields and sustainability of the strong month-on-month export growth will have a bearing on the price trend,” it added.
The soybean oil premium over CPO has also narrowed to around US$84 per tonne after the US Department of Agriculture raised its forecast soybean production for 2016-2017 to a new record high of 114.3 million tonnes.