(Bloomberg) – Palm oil may surge to the highest since 2012 as the strongest El Nino in almost two decades “ravages” production and squeezes inventories in the world’s largest growers, according to Godrej International Ltd.’s Dorab Mistry.
Prices in Kuala Lumpur, the global benchmark for the world’s most-used cooking oil, will jump to 3,000 ringgit ($730) a metric ton as world supply trails demand, Mistry said in remarks prepared for a conference on Wednesday. Futures last traded above the 3,000 ringgit level in September 2012, and would be 17 percent above 2,555 ringgit on Wednesday.
The tropical vegetable oil used in everything from chocolate to soaps and biofuel bucked a commodities rout last year as the dry weather caused by the worst El Nino since 1997-98 parched major palm-growing regions in Southeast Asia. Palm oil production in 2015-16 season ending in September may shrink by 3 million tons, Mistry said.
“I believe we must now cast aside all ideas of crude palm oil futures at 2,600 or 2,700 ringgit,” Mistry said. “We have to take prices to levels where demand does not expand and is made to shrink somewhat in price sensitive markets like India. That will mean BMD futures trading with a 3 rather than a 2,” he said referring to the contracts on Bursa Malaysia Derivatives.
Bullish View
Nine out of 13 analysts, planters and traders in a Bloomberg survey were bullish on prices to the end of the first half. Futures may climb to 2,700 ringgit by June 30, according to the median estimate of bullish respondents. Prices rallied to a 21-month high of 2,648 ringgit last month.
Prices are seen in a range of 2,700-3,000 ringgit until June as output drops and as Indonesia and Malaysia fail to meet their biodiesel usage targets, said Thomas Mielke, executive director at Oil World, an industry researcher. Production losses to dry weather may be further exacerbated if La Nina later this year triggers heavy rains, James Fry, chairman of LMC International Ltd., told the conference.
Output from Malaysia, the world’s largest producer after Indonesia, may see a “violent” drop of 1.5 million tons to 18.4 million tons in 2015-16, said Mistry who’s traded the vegetable oil for more than three decades. He cut the Indonesian output estimate by 1.2 million tons for the 2015-16 season. Malaysian production will fall by 1 million tons this calendar year to just under 19 million tons, while it will total 31 million tons in Indonesia, Mistry said.
Supply Gap
Global edible oil supplies will increase only 0.2 million tons in 2015-16, compared with 3.6 million tons a year earlier and 7.5 million tons in 2013-14, Mistry said. Total demand will expand by 4.5 million tons from 2.5 million tons a year earlier, he said.
“The gap between incremental supply and incremental demand will turn out to be almost a record 4.2 million tonnes. World stocks will be drawn down dramatically” in countries including Malaysia and Indonesia, as well as in top consumers India and China, Mistry said. “This will have a profound impact on veg oil prices during the rest of this year.”
Shrinking Inventories
Malaysian stockpiles slid to an 11-month low of 2.11 million tons in February from a month earlier, according to a Bloomberg survey of planters, traders and analysts. Inventories may tumble to as low as 1.7 million tons in June, according to Mohd Emir Mavani Abdullah, Chief Executive Officer of Felda Global Ventures Holdings Bhd.
World energy demand for palm oil will expand more than the previously estimated 1.5 million tons as the Indonesian biodiesel program is “now functioning well,” Mistry said. Food demand on the other hand may be tempered by higher prices and may expand by 3 million tons in 2015-16, less than the 4 million tons a year earlier, he said.
“The anemic production run is likely to continue until June,” Mistry said. “Consumers may only be able to heave a sigh of relief from July. Replenishment of stocks may take a bit longer – possibly until September 2016.”
