KUCHING: With crude palm oil (CPO) now trading at a significant discount to soybean oil (SBO) at US$419 per tonne, analysts expects to see demand improving from in the near term.
RHB Investment Bank Bhd (RHB Investment Bank) recapped that CPO prices have fallen by more than 30 per cent in the last three weeks, on the back of the lifting of the export ban as well as the issuance of the “flush out” export permits in Indonesia for those seeking an exemption from the Domestic Market Obligation (DMO) requirements.
“Although we anticipated for prices to fall as quickly as they rose on the back of the lifting of the export ban, the quantum of decline was larger than expected, leading us to believe that speculative activities are also at play,” the research firm said in its regional sector update.
RHB Investment Bank highlighted that other commodities like soybean prices also fell 10 per cent, wheat prices 14 per cent, while crude oil prices retreated 15 per cent in the last few weeks.
“In terms of fundamentals, we are beginning to see a light at the end of the tunnel with regards to supply of vegetable oils.
“Although the Russia-Ukraine war is still ongoing, we note that there has been some progress with regards to food exports as Russia and Turkey have agreed to pursue talks on a potential safe sea corridor in the Black Sea to export seeds and grain from the Ukraine.
“In Malaysia, while the labour shortage remains critical, we understand the first batch of Indonesian workers arrived on June 22, with the second batch on June 24.
“In Indonesia, since the lifting of the export ban and availability of the ‘flush out’ export permits (valid from June 8 to July 31, 2022), the government has issued permits to export 2.4 million tonnes of palm oil products.”
RHB Investment Bank gathered that CPO is now trading at a significant discount to soybean oil (SBO) at US$419 per tonne.
“With this, we should see demand coming back from consuming countries in the short term, particularly from price-sensitive countries like China, India, Pakistan and Bangladesh, given the extremely low stock levels currently.
“In addition, the palm oil-gasoil (POGO) spread has now turned positive – with gasoil now at US$5.30 per barrel (bbl) (US$39 per tonne), more expensive than CPO (from -US$36 per bbl last month) – making it now financially feasible to produce biodiesel without subsidies.”
The research firm noted that as such, stock levels should remain tight for the next two to three months, possibly until end-third quarter (3Q), thus supporting CPO prices at current levels.
“However, as fundamentals improve thereafter – on the assumption that labour shortages are somewhat resolved and the Ukrainian oilseed output is able to be exported out, CPO prices could fall to lower levels of RM4,000 to RM4,500 per tonne for the rest of the year.”
RHB Investment Bank’s price assumptions of RM5,300 technically assume a price average of circa RM4,300 for 2H22, which could be surpassed on the downside, based on the current trajectory.