Palm Oil Prices To ‘Stay Strong’ – For Now

(Agrimoney) – TA Securities reassured on palm oil prices – for now – saying the hangover to Malaysian output from El Nino is not over yet, even as futures pulled out of a decline which had dragged them 7% lower in less than a week

The Malaysia-based broker forecast that palm oil prices would “stay strong in the first half” of 2017, as plantation yields continue to be depressed by the knock-on effects of dryness blamed on the El Nino which lasted into early 2016.

With the weather pattern not reversing into La Nina territory – which is historically positive for Malaysian palm oil output – until mid-July last year, and the impact on output typically lagging by some six-to-nine months, “we would still see the impact of El Nino lingering”, TA Securities said.

The broker forecast that Malaysian palm oil output will “recover only in the April-to-June quarter of 2017 onwards”.

‘Moderate improvement’

And even when the impact of La Nina – associated with cooler and wetter conditions – does kick in, the fact that the weather pattern occurred only a weakened state will limit its benefit to Malaysian production.

“Since the current La Nina is considered weak, similar to the phenomenon experienced in 2007-08 and 2010, we would only expect a moderate improvement in palm oil production this year.”

The broker contrasted the latest La Nina with that in 1999, when a strong version of the weather pattern, besides the maturation of oil palm trees seeded in a plantations drive, was seen as fuelling a 26% rebound in Malaysian output.

The comments came as May futures rose in Kuala Lumpur for the first time in five sessions, recovering from a three-month low of 2,763 ringgit a tonne set earlier to end up 0.9% at 2,809 ringgit a tonne.

Price weakness ahead

Nonetheless, futures remain 12% below highs set late last year, with expectations of reviving output blamed for the decline.

And, indeed, TA Securities forecast that better production ideas would catch up with prices eventually, foreseeing prices “tapering off in the second half of 2017, following recovery in output and in the ringgit”.

A stronger ringgit cuts the value, in Malaysian terms, of assets traded internationally in dollars.

The broker, also flagging the threat to prices from weak demand from key imports China and India, forecast palm oil futures averaging 2,700 ringgit per tonne for 2017 as a whole “barely changed from the 2,648-ringgit-a-tonne level in 2016”.

‘Dismal chart’

Elsewhere in the oilseeds market, futures in rival vegetable oil soyoil also gained on Wednesday, standing 0.7% higher at 32.91 cents a pound in Chicago, recovering from a five-month closing low in the last session.

The revival, fuelled by the recovery in palm oil futures, defied some weak technical factors.

“The soyoil chart looks dismal,” said Richard Feltes at RJ O’Brien, flagging the breach in the last session of a key price points suggested by Fibonacci analysis, “leaving next support at 31.5 cents a pound”.