12/07/2008 (The Star Online), Petaling Jaya - Analysts remain optimistic on the outlook for crude palm oil (CPO) despite the rising palm oil inventory and lagging exports vis-à-vis production during the first half of the year.

“Demand has not kept up with production, thus capping the upside for CPO price and leading to a yawning price discount to soy oil of US$400 per tonne currently from US$100 in 2000-2007,” CIMB Research said in an update yesterday.

The firm added that the huge gap augured well for palm oil as price-sensitive buyers would opt for the cheaper alternative as they stocked up cooking oil in the third quarter, ahead of Deepavali and the Ramadan month.

CPO futures traded on Bursa Derivatives have risen 17% year-to-date but trailed behind the soybean oil futures in Chicago, which gained 30% during the same period.

The benchmark CPO futures contract for September delivery closed up RM64, or 1.8% yesterday at RM3,575 per tonne.

On Thursday, the Malaysian Palm Oil Board’s monthly statistics for June showed that palm oil stockpile in the country was at a record 2.035 million tonnes as export volume declined.

“We do not think the higher stock level is an issue, given the seasonal factor of higher production and exports in the second half of the year,” RHB Research Institute said yesterday.

It noted that palm oil production during the first half was up 22.8% compared with the same period last year, while exports grew 14.6%.

RHB expects output to continue to rise as the industry enters peak production season, but it also foresees growing export volume during the festive seasons.

Demand for palm oil could also rise in the coming months due to an expected shortfall in soybean oil supply from the US, according to OSK Research.

“Also, China will inevitably have to start increasing its purchases,” OSK said.

Exports to China slowed down in June but were up 9.9% so far this year. It is believed that China has increased the usage of state edible oil reserves in the past weeks to stabilise domestic food prices.

Meanwhile, crude oil traded in New York surged to a fresh high yesterday. It hit US$145.98 per barrel at about 7pm Malaysian time yesterday.

CPO and crude oil continued to move in tandem over the past one year, although some analysts feel that the link between the two commodities was overplayed as CPO had ceased to be a viable feedstock to make biodiesel since late last year.

“While we think it is difficult for palm oil to resist any downward pressure from crude oil, the downside for CPO will be relatively limited,” OSK said.