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THE price of crude palm oil (CPO) has bottomed out, experts say, but it is not expected to develop into a bull market.

Sentiments at the Malaysian Palm Oil Trade Fair and Seminar 2014 last week indicate that prices have lifted off the recent low in September. CPO prices had fallen some 28% this year to RM1,914 per tonne on Sept 2, a low not seen in five years. It closed at RM2,281 last Thursday.

“We are not going to revisit this low again even if [Brent crude] oil prices decline to US$75 per barrel,” said Thomas Mielke, executive director of ISTA Mielke GmbH, publisher of Oil World. He was speaking at the two-day seminar in Kuala Lumpur.

Mielke forecast CPO futures prices will range from RM2,300 to RM2,500 per tonne between January and March next year.

Similarly, Dorab Mistry, renowned forecaster and director at Godrej International Ltd, said CPO prices are expected to rise gradually from Dec 10, 2014, to RM2,500 per tonne by March 2015.

“I do not expect a runaway bull market. Stocks will peak at end-October and then decline until July 2015,” he said, justifying the expected positive price reaction to the November stock data, which will be released on Dec 10 by the Malaysian Palm Oil Board (MPOB).

A key point highlighted by the speakers last Wednesday is that the global supply of oil and fats is not growing fast enough to meet demand.

According to Mielke, the world is facing a shortage situation as the oil and fats market is expected to grow by 3.9 million tonnes in the 2014/15 season while food demand alone is rising by some four to five million tonnes a year.

Mistry’s forecast is slightly more conservative at 3.5 million to 4 million tonnes. “Overall, world demand will grow by 4.5 million tonnes [accounting for a one million tonne growth in biofuel demand], if we are conservative.”

Mielke said world production of palm oil will rise by only two million tonnes for the 2014/15 season. “Therefore, I think palm oil prices will at least increase moderately over the next couple of months.

“The world’s stocks of soybeans are likely to rise to a record 87 million tonnes at the end of the 2014/15 season. This looks bearish, but it is probably already discounted in the price … The upward potential in CPO price is limited as long as we have the overhanging big stock of soybeans.”

The oilseeds sector might be faced with capped commodity prices, and Mielke raised the question that it could be on the brink of a longer period of surplus stocks and depressed prices.

“In 2015, we are not optimistic because of the lag effect of dryness we have seen in early 2014.”

Mistry echoed this sentiment, saying, “The dry patch of February/March 2014 has finally taken its toll and is having an effect on oil palms in Malaysia.”

He forecast palm oil production in Malaysia to come in at about 19.6 million to 19.8 million tonnes in 2014.

Indonesian production will reach 30 million tonnes at best due to extended periods of dry weather, he said.

The combination of tightening supply and growing demand for palm oil will buffer CPO prices, but it will still be range-bound due to the price of Brent crude oil.

Be that as it may, he said now is a good time to buy plantation equities, with his top picks being Malaysia’s Sime Darby Bhd and Singapore-listed Wilmar International Ltd.

Caution on Brent

The market needs to keep an eye on the price of Brent crude oil, which sets the floor as well as range for CPO prices, Dr James Fry, chairman of LMC International Ltd, said at the seminar.

CPO tends to trade at a premium to Brent based on supply factors. But in the past two years, prices had slid to a zero-premium level three times, although it was short-lived.

Recently, Brent crude oil dropped more than 27% to a low of US$86.79 per barrel on Oct 15, from this year’s US$115.06 high on June 19. Year to date, it has lost more than 21%, steadying just above US$86 per barrel last Thursday.

At this price level, Fry estimated that CPO prices could have an upside to RM2,300 per tonne. “If we look ahead six months, declining MPOB stocks should support the CPO premium over Brent,” he notes.

“If [Brent crude] oil prices appreciate, the stage is set for higher [CPO] prices, and vice versa if [Brent crude] oil goes down further to US$75 per barrel or less, which we cannot exclude,” Mielke said.

Fry pointed out that market dynamics are changing with the rising popularity of shale gas, which is starting to eat into the Brent crude oil market.

Global output growth of Brent crude oil is forecast at 1.7 million barrels a day this year. Demand growth, however, is projected at only 700,000 this year.

“That is a gap of one million surplus and next year, we are expecting another surplus. There is a structural surplus of petroleum emerging,” Fry opined.

But while the growing supply could press down prices, oil-producing countries are likely to increase production instead to maintain their level of oil revenue, he said, highlighting the structural issue.

If this happens, Brent crude oil and CPO prices will both come under pressure, Fry concluded.

This article first appeared in The Edge Malaysia Weekly, on November 3 - 9, 2014

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