01/08/2023 (Invezz) - Palm oil price has staged a strong comeback in the past few weeks as investors refocus on the ongoing drought. After tumbling to 705 in May, the price surged to a high of 895 in July even as other commodity prices remained under intense pressure.

Demand and supply dynamics

Palm oil is one of the most useful commodities in the world. It has unique characteristics like its semi-solid state, longer shelf life, odourless, and its stability at high temperatures. As a result, palm oil is used in almost everything, including cooking oil, biofuel, chocolates, shampoos, and deodorants among others.

Therefore, demand for palm oil is a function of the growing population and economy. As the proportion of the middle class rise so does the demand. At the same time, supply is usually dependent on key countries like Indonesia and Malaysia which account for more than 85% of total global production.

Countries in Southeast Asia are currently going through a major El Nino event that will likely have an impact on supplies. According to CNA, some parts of Indonesia are seeing extremely dry weather, leading to water shortage and crop failures.

El Nino is a major concern

The impact of this El Nino event is that it will lower palm oil supplies. Data shows that production in May was about 321k tons above April’s production. As such, there is a likelihood that a new downward trend wll continue.

One way of looking at this situation is history. In 2015 and 2016, when the last El Nino happened, yields in Indonesia dropped from 20.53% to below 20%. Yields also declined in the next few years, averaging about 19.83% in 2022 and 2023.

Malaysia is also going through El Nino, which will likely disrupt the recent growth. The number of palm oil bunches dropped from 103.2k bunches in 2018 -19 to just 89,500 during the pandemic. It rose to 91,400 in 2021-22 as production rose. Therefore, there is a likelihood that production will struggle to move to historical average.

Outlook for palm oil prices

I suspect that palm oil prices will resume the bullish trend later this year as investors react to the rising demand and falling supplies. Historically, it takes time for weather events to have an impact on prices.

Therefore, there is a likelihood that prices will rise and possibly retest the April high of $981. A likely supply issue that could have an impact on prices is the growing production in India, which is seeking to be self-sufficient. The country is aiming to increase the supplies from 270k tonnes in 2019-20 to 1.12 million tons by 2025.

https://invezz.com/news/2023/08/01/palm-oil-price-analysis-as-el-nino-complicates-supply-dynamics/