06/11/2017 (The Edge Markets MY) - KUALA LUMPUR (Nov 6): Palm oil inventories in Malaysia probably climbed to the highest since January 2016 last month as output in the world’s second-largest producer rose.

Stockpiles increased 8.9% from September to 2.2 million metric tons in October, according to the median estimate of nine planters, traders and analysts surveyed by Bloomberg.

That would be the fourth monthly increase. Crude palm oil production climbed 9% to 1.94 million tons, the biggest monthly increase since July, while exports rose 2% to 1.55 million tons, the survey showed. The Malaysian Palm Oil Board is set to release official data on Nov 10.

Benchmark palm oil prices have rallied around 13% in the second half of 2017 so far after a much-anticipated recovery in yields missed expectations. Production has been “disappointing” in Malaysia, according to James Fry, chairman of LMC International Ltd. Prices could rally to RM3,100 (US$731) a ton by January as stockpiles are not increasing even during the current high-production cycle, Dorab Mistry, director at Godrej International Ltd., said last week.

“October is a crucial month to watch for Malaysia as it could indicate the trend for yields and supplies for the rest of the year,” said David Ng, derivatives specialist at Phillip Futures Sdn Bhd in Kuala Lumpur. The market is expecting stockpiles to increase moderately, with any strong growth in October a bearish surprise for the market, he said.

Palm oil for January delivery on Bursa Malaysia Derivatives declined 0.8% to RM2,783 a ton by the midday break in Kuala Lumpur on Monday.

La Nina Watch

Weather will be a key area to watch in the coming months, with market participants paying close attention to the looming La Nina. Higher-than-usual rainfall caused by La Nina could potentially reduce palm oil yields due to disruption to harvesting and formation of healthy fruit bunches, Ivy Ng, regional head of agribusiness at CIMB Investment Bank Bhd., wrote in a Nov. 2 note. However, a weak La Nina is unlikely to significantly disrupt supplies and trigger a strong price rally, she said.

Futures in Malaysia may face some downward pressure in the next four to eight weeks, with global palm production seen exceeding consumption by 1.3 million to 1.8 million tons in the oil year through to September 2018, according to Thomas Mielke, executive director of Oil World. Prices, however, will not go below RM2,650, he said at an industry conference in Bali last week.

Malaysia’s imports were forecast at 40,000 tons, little changed from 41,173 tons in September. Estimates for domestic consumption ranged between 210,000 tons and 250,000 tons.