Palm Oil Futures Retreat, as Double Dose of Data Fuel Demand Fears

(Agrimoney) – The recovery in palm oil futures went into reverse after a double dose data spurred concerns that the vegetable oil’s narrowed premium over rival vegetable oil soyoil was undermining demand.

Palm oil futures gave back early gains to close at 3,071 ringgit a tonne in Kuala Lumpur for April delivery, a 0.9% drop on the day.

The reversal followed data from the Malaysia Palm Oil Board showing that Malaysian palm oil inventories, while dropping by 7.6% in January to a five-month low of 1.54m tonnes, fell by less than investors had expected.

Although January’s output in Malaysia, the second-ranked palm oil producing and exporting country, came in short of expectations, so did shipments.

The implied number for domestic consumption last month, factoring in also a rise in imports, came in below 192,000 tonnes – a drop of 22% month on month.

That was “sharply down on expectations” for a rise in domestic use to some 269,000 tonnes, said Ed Hugo, analyst at London-based broker VSA Capital.

Palm oil vs soyoil

Separately, data from cargo surveyors showed an easing in Malaysia’s palm oil exports so far in February, with SGS putting the drop at 0.4%, month on month, and ITS at 3.1%.

The data stoked ideas that the fall in soyoil’s premium over palm oil – much watched as the two vegetable oils are interchangeable in many uses – has fallen to some $60 a tonne, from $100 a tonne at the close of last year.

“The narrowing soyoil premium over crude palm oil is currently proving a headwind for exports,” Mr Hugo told Agrimoney.com.

‘Price has to fall’

The dynamics stoked ideas of weaker palm oil prices ahead, as South East Asian production begins its seasonal recovery from lows typically reached in Malaysia in February.

“In the March-May timeframe we expect production to pick up and palm oil prices fall,” Chicago-based broker Allendale said.

Last week, respected analyst James Fry, at consultancy LMC International, forecast that Malaysian palm oil prices could fall to 2,500 ringgit per tonne by the July-to-September quarter as output recovers.

“Palm oil has to fall to capture market share from soyoil in markets like India,” Mr Fry told a conference in New Delhi.

‘Extremely rare occurrence’

However, VSA Capital’s Ed Hugo flagged some more positive points for prices, at least short term, highlighting that even though Malaysia’s palm oil exports fell below expectations, their rise above the December total represented an “extremely rare occurrence”.

Furthermore, the February data had shown an easing, to 8.2%, in Malaysia’s stocks-to-use ratio for palm oil.

This may “offer a more bullish tone to the market, especially when combined with expectations for low production this month”, he said.