Palm Oil Seen Extending Bull Run as El Nino Reduces Output

Palm oil’s bull run has further to go as El Nino-induced dry weather curbs production in the world’s top growers.

Nine out of 13 analysts, planters and traders were bullish on prices to the end
of the first half, according to a Bloomberg News survey. Futures may climb to
2,700 ringgit a metric ton by June 30, according to the median estimate of
bullish respondents. Palm oil traded at 2,547 ringgit on Tuesday.

Futures in Kuala Lumpur rallied to a 21-month high last month on concern that the strongest El Nino in almost two decades and Indonesia’s biodiesel programs will squeeze supplies. Production in Southeast Asia may experience the worst impact since the 1997-1998 El Nino, according to James Fry, chairman at LMC International Ltd.

"Palm oil prices are facing a perfect storm of the drought, which will hit output, and the new demand of biodiesel from Indonesia,” Fry said in an interview in Kuala Lumpur on Monday. The effects of El Nino-induced drought on production are more severe than initially expected by the industry, he said.

The impact of dry spells on productivity may be felt in the second and third quarters of 2016, according to Mohd Emir Mavani Abdullah, Chief Executive Officer of Felda Global Ventures Holdings Bhd, the world’s biggest producer of crude palm oil.

Falling Inventories

Inventories in Malaysia may fall to as low as 1.7 million tons in June, Mohd Emir said on Friday. Stockpiles slid 8.7 percent to 2.11 million tons in February from a month earlier, according to a separate Bloomberg survey of planters, traders and analysts. Prices could trade between 2,500 ringgit and 2,600 ringgit until the second quarter, he said.

In Indonesia, demand for biofuel will soak up some supply in the top producer. The country’s B20 program, which mandates a 20 percent minimum palm content in diesel, will lift domestic consumption, said Sahat Sinaga, executive director at the Indonesian Vegetable Oil Industry Association.

About 200,000 tons to 250,000 tons of biodiesel will be used per month, said Fadhil Hasan, executive director at the Indonesian Palm Oil Association.

Biodiesel

While demand has risen as Indonesia kickstarts the biodiesel program, blending may still hover below monthly targets due to logistic constraints and sluggish diesel demand, said Bayu Krisnamurthi, chief executive of Indonesia Estate Crop Fund for Palmoil.

Bumper harvests of rival soybeans may cap palm’s rally. “Prices should shoot through the roof, but ample soybeans are dampening the price recovery,” said Ling Ah Hong, director of Malaysian plantation consultant Ganling Sdn.

Futures for May delivery on Bursa Malaysia Derivatives rose 1.2 percent on Monday, the biggest daily gain for a most-active contract since Feb. 12. Prices are up 2.3 percent this year after climbing 10 percent last year.

--With assistance from Eko Listiyorini To contact the reporters on this story: Anuradha Raghu in Kuala Lumpur at araghu3@bloomberg.net, Yoga Rusmana in Jakarta at yrusmana@bloomberg.net. To contact the editors responsible for this story: Phoebe Sedgman at psedgman2@bloomberg.net, Sungwoo Park

By: Anuradha Raghu and Yoga Rusmana

©2016 Bloomberg News