PETALING JAYA: Palm oil prices are expected to stay weak into the second half of the year with supplies likely to be higher into the third quarter amid lackluster demand, said OCBC Bank economist Barnabas Gan.
He noted on that the bank continued to stay bearish over palm oil prices into the second half given the fundamental picture.
“With supplies likely to print higher into the third quarter amid lackluster demand, we keep our third quarter price outlook at RM2,250 per metric tonne (MT) with downside risks, before seeing some recovery to our RM2,400 per MT estimate into year-end as supplies dwindle then,” he added.
Gan said the demand for crude palm oil has been surprisingly weak into June this year, a key driver for falling palm oil prices of late.
“Statistically, Malaysia’s crude palm oil exports in May fell 70.5% year-on-year (y-o-y) to 107 thousand metric tonnes, the lowest level since Feb
2007. Indonesia’s crude palm oil exports has also contracted by four consecutive months into April 2018.
“Production declined as well, seen from a 7.8% y-o-y contraction in Malaysia’s CPO production in May. Inventories however remain flushed at 2.2 million metric tonnes in the same period, highlighting that supplies remain adequate to-date.
“Still, supplies are also expected to expand further into October 2018 given seasonal factors, a rather persuasive driver that could keep palm oil bulls at bay for now,’’ he noted.
Meanwhile, OCBC Commodities Second Half 2018 Outlook report stated that while weak La Nina conditions were reported in early this year, indicators are now “consistent with an imminent decay” of the said La Nina event, citing the views by the World Meteorological Organisation.
The agency added that there would be a transition to neutral conditions and a continuation of La Nina condition would be unlikely into 2018.
Gan noted that past weather extremities were drivers that rallied palm oil prices (1998, 2001, 2008), adding that the recent El Nino as of 2015 rallied prices by as much as 31% y-o-y, though recent declines in palm prices indicated the lack of weather extremities to-date.
“With neutral weather conditions to play out, it suggest that any swings in palm oil prices due to weather conditions is highly unlikely at this juncture,’’ he said.
Trade tariffs and China’s threat to restrict soybean imports from the US should drive palm oil prices higher, though it remains to be seen at this juncture, Gan added.
“Should history be of reference, palm oil prices surged on fresh trade tariff-related news in April 2018, highlighting market bets over potentially higher Chinese palm-related imports,’’ he said.
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