Palm oil prices rally despite weak fundamentals

In a recent assessment, the Mintec Benchmark Price of Crude Palm Oil (CPO) CIF Rotterdam [Code CPOR], reached $945.50/mt per metric tonne on 19th June. This marked a significant increase of $70.00/mt compared to the previous week. The surge in prices can be attributed to two main factors: the rising cost of soybean oil and concerns regarding the potential impact of the El Nino weather pattern on palm oil production.

The escalating prices of soybean oil have had a direct impact on the rise in crude palm oil prices. Soybean oil and palm oil are often considered substitutes in various applications, so an increase in soybean oil prices also tends to drive up palm oil prices.

Moreover, market participants are apprehensive about the near-term consequences of the El Nino weather phenomenon on palm oil output. The El Nino weather pattern, known for its unpredictable climatic effects, has raised concerns among market players regarding palm oil production.

Adding to the market uncertainty, Mintec recently received reports indicating a substantial decrease in exports from Malaysia during the first half of June, ranging between 16% to 18% compared to the same period last month. This decline in exports can be attributed to limited buying interest from key players such as China and India. Data submitted to Mintec showed notable declines in palm oil imports over May, with Chinese imports decreasing by 35% compared to April.

Furthermore, production estimates provided to Mintec have presented a wide range of -9% to +4%. This variability highlights the difficulty in predicting Malaysia's palm oil production, leaving market participants uncertain about the country's production levels. The production uncertainty is in part due to Sabah, Malaysia's largest palm oil-producing state, facing additional challenges due to water stress caused by early signs of an El Nino event. These unfavourable conditions have led to reduced yields, further exacerbating the impact of previous issues such as under-fertilisation due to high costs and limited labour availability and potentially curtailing production further in the coming months.

If the current production estimates hold, experts anticipate a potential 2% increase in end stocks. This projected rise in end stocks, combined with modest demand for palm oil, suggests a mildly bearish market outlook from a fundamental standpoint. Therefore, future price trends of palm oil will depend on various factors, including the upcoming Environmental Protection Agency (EPA) announcement and the severity of the El Nino event in the country.