Palm oil prices, which hit a 20-month high on Thursday, could be nearing their peak, as competition from other vegetable oils weighs on the market, Commerzbank said.
Palm oil futures touched 2,568 ringgit a tonne in Kuala Lumpur, their highest since May 2014, in a rise attributed to lingering concerns over the dent to South East Asian production from dryness blamed on El Nino, which has a history of lowering rainfall in the region.
Indeed, futures have bounced some 36% from a seven-year low reached in August.
Commerzbank, while acknowledging the threat to output in the key Indonesian and Malaysian plantations from dryness, said that further upside in futures is “limited” by the low price of oil, and competition to palm oil from soyoil.
In fact, Kuala Lumpur’s benchmark April palm oil contract eased back to settle at 2,531 ringgit a tonne on Thursday, a 0.8% decline, in a retreat blamed on strength in the ringgit, which reduces the competitiveness of Malaysian exports.
Demand trend up
“Expectations are that global production will edge up only marginally in 2015-16, which argues for rising prices in the short term, as demand remains on the uptrend,” Commerzbank said.
But Commerzbank said that “further upside should be limited”.
Palm oil is facing stiff competition from other vegetable oils, as soybeans are in “abundant supply,” Commerzbank said.
“As regards price competition, palm oil thus has to stand its ground against soybean oil in order to maintain the market shares secured in recent years,” the bank noted.
Crude oil weighs
Commerzbank also noted that the current very low price of crude oil is weighing on vegetable oil prices, by reducing demand for biofuels.
“This does not only hold for the importing countries but also for the palm oil producers themselves,” Commerzbank warned.
According to the Indonesian Palm Oil Association, the low oil price could cause Indonesia to miss its target of 20% biofuel use in road fuel.
“And in Malaysia, the minister in charge sees the local biodiesel programme at risk.”
Lower biofuel use in the world’s top palm oil producers would increase the exportable surplus.
Prices have also been helped by the weakening of the Malaysian ringgit against the dollar.
But the ringgit saw “sharp gains” against the dollar in January 2016, Commerzbank noted.
“If this remains trend intact, it will also influence further price development, as foreign importers would have to pay higher prices for Malaysian palm oil,” Commerzbank said.
Commerzbank noted that some of the current strength could be coming from the New Year’s festival in China, which takes place next week, and increasing demand for vegetable oils for food.
El Nino support
But there is potential for price support from dry weather in Indonesia and Malaysia, which between them produce most of the world’s palm oil
“Even though El Nino may have passed its peak, expectations are that palm oil production is likely to be adversely affected in the first half of 2016,” Commerzbank said.
El Nino is associated with dry weather in south-east Asia.
With El Nino dampening palm oil production, prices look set to rise further. But the upside should be limited by the abundant global supply of soybeans, which sets the trend for the competing soybean oil.
(Source – http://www.agrimoney.com/news/commerz-warns-over-palm-prices-even-as-futures-hit-20-month-top–9265.html)