11/03/2010 (The Hindu Business Line), Kuala Lumpur - The relationship between crude petroleum oil and vegetable oil via the biodiesel route is by now well established. Changes in the crude petroleum market fundamentals are sure to impact vegetable oils including palm oil.

In petroleum which is a normal market, currently high prices are lifting supplies while slowing demand; and the development will have implications for palm oil this year, according to Dr James Fry, Chairman of the UK-based global consultancy LMC International Ltd.

At the Palm and Lauric oils Price Outlook 2010 organised by Bursa Malaysia and CME Group here, he was speaking on the theme: ‘Is it smooth sailing or choppy waters ahead'. Because high prices are lifting supplies and slowing demand in the petroleum sector, prices will eventually drop to more sustainable levels, the timing of which is uncertain though, the expert opined.

Bio-fuel effect
On the other hand, the “old world” where stocks were the main influence behind palm oil prices has vanished, Dr Fry asserted, adding the arrival of bio-fuels has reduced the role of stocks; and since early 2008, they have determined only the premium of crude palm oil over petroleum prices.

Suggesting that current prices of crude palm oil (CPO) are somewhat too high considering stock levels and soyabean oil prices, stock movements and the extent of discount crude palm oil suffers over other oils, the speaker said if Brent crude were to remain stable at a shade less than $80 a barrel over the next six months, CPO will take a gradual dip to below 2,600 Malaysian ringgit (MYR) a tonne over the period.

However, if crude were to gradually weaken and move close to $70 a barrel, then CPO could decline to 2,450 MYR a tonne. “I fear a double-dip recession led by the PIGS (Portugal, Italy, Greece and Spain) of Europe, but not sparing the US. Many governments will start cutting their budget to reduce their deficits and their borrowings will drive up interest rates which will magnify the recessionary impact of the spending cuts,” he remarked. The big question, according to the expert, is how soon this will affect crude oil and therefore, push down CPO prices. Higher interest rates and Government spending cuts will probably not hit economies until after June. “So, I would put the chance of a sharp drop in Brent crude prices within six months only at 25 per cent, but at 50 per cent within a year.”

Fundamental approach
Making a fundamental approach to the price outlook of palm and lauric oils and impacts from the global vegetable oil markets, Mr Thomas Mielke, Executive Director of ISTA Mielke, publishers of the renowned Oil World, suggested that current prices of $845 a tonne for refined palmolein (f.o.b Malaysia) and $810 a tonne for CPO (f.o.b Indonesia) may be too close to their highs, implying that unless new bullish factors materialised, there was no upside to the market.

Highlighting the record global production of 10 major oilseeds at an estimated 430 million tonnes for 2009-10 and big supply pressure ahead for soyabean and soyameal from March, the analyst said vegetable oil demand (food and non-food) is set to exceed production again this year with bio-fuel output set to accelerate. While oilseed stocks recover, oils and fats stocks are likely to decline further in 2009-10, he argued. Mr Mielke saw sunflower oil prices rising steeply by $120-150 a tonne from current values.