This article first appeared in The Edge Malaysia Weekly, on October 26 - November 1, 2015.

Commodity prices are expected to remain subdued for the rest of this year and the next due to various factors.

The price of crude oil will likely remain low at US$50 per barrel in 2015, trending down to US$48 per barrel in 2016 amid an over-supply situation, according to the Economic Report 2015/16. The market view is for crude oil prices to range between US$45 and US$55 a barrel.

Crude palm oil (CPO) prices are expected to average RM2,200 per tonne, 8.83% lower than the average of RM2,413 recorded last year.

The report says CPO prices are expected to improve as the El Niño impact, implementation of biodiesel mandates in Malaysia and Indonesia, and the protracted haze period have put pressure on palm oil inventories.

Liquefied natural gas (LNG) prices are expected to be compressed over the medium term once Japan restarts its nuclear power plants and regional power supply increases, mainly from Australia.

The government expects a flat growth of 1.3% in the agriculture sector due to an improvement in the plantation subsector and stronger growth in the food commodity subsector.

CPO production is projected to edge up 1% to 20.1 million tonnes on improved yields and expansion in mature areas.

Overall, export earnings from commodities plummeted 15.7% to RM96.93 billion from January to August this year compared with a growth of 8% to RM115.05 billion in the same period last year.

Receipts from agricultural goods fell 5.2% due to a contraction in rubber and palm oil exports while weak global demand and excess supply of crude petroleum and LNG dented mining exports by 22.7%.

The government also expects rubber production to increase 0.7% to 680,000 tonnes as various measures are taken to increase production amid stable rubber prices.

The mining sector is projected to record a growth of 4% in 2016 on the back of higher output of natural gas and crude oil.

Crude oil production is also expected to expand 1.6% to average 640,000 barrels per day in 2016.

The production of LNG is expected to increase 5.1% to 6.75 billion standard cu ft per day in 2016, as the commencement of the floating liquefied natural gas project in Sarawak will produce 1.2 million tonnes of natural gas annually and the Train 9 LNG facility begins full operation in early 2016.

Hong Leong Investment Bank economist Sia Ket Ee says crude oil prices are expected to range between US$45 and US$55 per barrel next year.

“Next year, commodity prices may not improve significantly because the over-supply situation still persists even though there is some correction in the oil rig count,” he says.

“The demand side is not improving that fast. You have the slowdown in China and also the US recovery has not been as strong as expected.”

Low oil prices will affect the demand for biodiesel, thus weighing down CPO prices, CIMB Investment Bank analyst Ivy Ng says.

Prices are also affected by stiff competition from Indonesia and the abundance of soybean oil.

“They (Indonesia) are more competitive than Malaysia because they have tax on their products, which means their refineries get lower CPO cost compared with their Malaysian counterparts so they can compete better when it comes to the export market,” she says. “Their CPO is cheaper because of the export levy of US$50 per tonne of CPO.”

Ng expects CPO prices to average RM2,230 this year and RM2,450 next year. CPO prices are expected to trace higher levels next year on the back of El Niño and Indonesia’s implementation of its B15 biodiesel mandate.

However, CPO is facing intense competition from soybean oil, which hit record production levels last year and may do so again this year.

The Economic Report 2015/16 notes that export receipts from palm oil declined 8.3% to RM25.8 billion in the first eight months of 2015 (8M2015) compared with RM28.2 billion in the same period last year (8M2014), mainly due to an 11.4% drop in the average unit value (AUV) to RM2,396 per tonne.

This was despite a marginal increase in the export volume of palm oil to 10.79 million tonnes in 8M2015 from 10.41 million tonnes in 8M2014.

The report highlights that export receipts for crude petroleum shrank 26.4% to RM16.31 billion in 8M2015 from RM22.18 billion in 8M2014 as crude oil prices remained low.

This was despite an uptick in export volume of 20.3% to 9.64 million tonnes from 8.02 million tonnes in the same period last year. The AUV for crude petroleum contracted 38.8% to an average of RM1,692 per tonne, reflecting weak demand from key trading partners such as Australia, India and Japan.

LNG export receipts also declined 25.8% to RM31.3 billion in 8M2015 compared with RM42.18 billion in 8M2014 despite a marginal increase in export volume to 16.52 million tonnes from 16.38 million tonnes.

This was due to a 26.4% drop in the AUV of LNG to an average of RM1,895 per tonne in 8M2015 compared with an average of RM2,576 per tonne in 8M2014.

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