CPO stockpile highest in 21 months, exerts pressure on prices

Malaysian palm oil futures extended gains on Thursday evening, supported by strength in soyoil markets, favourable export numbers and end of year production concerns

PETALING JAYA: The alarming rise in the palm oil stockpile and higher production will likely exert downward pressure on crude palm oil (CPO) prices in the near term, according to analysts.

The Malaysian Palm Oil Board’s latest statistics revealed that the palm oil inventory for end-October jumped to its highest level in 21 months at 2.19 million tonnes, while the CPO output surpassed two million tonnes – the highest level in two years.

“The only wild card that could provide support to CPO prices is the crude oil price, which has been creeping up recently,” said Public Investment Bank (PIVB) Research in its latest report.

PIVB said the average CPO price for October was down slightly from RM2,776 per tonne to RM2,742 per tonne. On a year-to-date basis, the average CPO price rose from RM2,577 per tonne to RM2,841 per tonne, up 10.2%.

Kenanga Research, meanwhile, expected palm oil stocks in November to go up by 3% to 2.25 million tonnes on a higher supply of 1.78 million tonnes against a demand of 1.72 million tonnes.

“The CPO price outlook is flat to weaker, as a decent soybean oil (SBO)-CPO premium and weaker production outlook contrasts with a declining US dollar to ringgit rate and rising stocks.”

The research unit was maintaining the CPO price at RM2,700 per tonne for financial year 2017 (FY17) and RM2,400 per tonne in FY18.

“We also expect a slightly higher fourth-quarter 2017 CPO price range of RM2,500-RM2,800 per tonne (from RM2,450-RM2,770 per tonne), reflecting higher SBO and crude oil prices even though this is dampened by the lower US dollar-ringgit rate.

Kenanga Research pointed out: “As potential CPO price catalysts (decent SBO-CPO premium and weaker production) face off with drawbacks (the declining US dollar-ringgit rate, rising stocks), we expect prices to be flat to lower over the short run.”

The SBO-CPO premium price has slightly widened to about US$110 per tonne as of this month against a September-October 2017 premium of US$95 per tonne, boding well for demand.

Production should also weaken seasonally, with the additional risk of La Nina at 50%-65% odds, according to the US and Australian forecasts, which would be positive for CPO prices.

However, with ringgit-based CPO prices positively correlated to the US dollar-ringgit rate, the recent appreciation of US$1 to RM4.20 from US$1 to RM4.50 in January could have a negative impact on CPO prices.

Also, previous studies on CPO prices to stock levels indicated that CPO prices tend to drop as stock levels exceed 2.20 million tonnes, which is expected to occur this month, said Kenanga Research.

“With the clashing positive and negative price drivers, we expect CPO prices to trade somewhat range-bound with a greater possibility of weakness should export survey (a demand indicator) come in weaker than expected as the month progresses,” added the research unit.

Meanwhile, CIMB Research is raising its CPO price forecast for 2017 to RM2,800 per tonne from RM2,600 per tonne.

“The average CPO price for the first 10 months of 2017 rose 11% to RM2,832 per tonne. This is better than our expectations due to a slower-than-expected palm oil supply growth and better soybean oil prices,” it added.

But there is no change to its CPO price forecast of RM2,700 per tonne for next year.

CIMB Research, which is maintaining a neutral call on the sector, expected local planters to post stronger earnings in third-quarter 2017 on higher production.

As at 5pm yesterday, the benchmark CPO futures contract for January was trading RM20 lower at RM2,777 per tonne.


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