Palm Oil May Slump by June as Premium Delays Buying, Fry Says

Palm oil prices may slump by June as production recovers and an “exceptionally high” premium over diesel prompts buyers to delay purchases until mid-2011, LMC International Ltd. Managing Director James Fry said today.

Palm oil futures in Malaysia will fall to 2,600 ringgit ($826) a metric ton, from a 28-month high of 3,537 ringgit today, as high prices curb demand, Fry said at a conference in Bali.

“I still expect crude palm oil prices to fall but, in view of low 2010 output, more slowly than I expected earlier,” Fry said. “By June, with output rising fast, a reasonable South American soybean crop should pull the price back to near 2,600 ringgit,” he said.

Palm oil has jumped 55 percent from this year’s low on July 7 as heavy rains caused by the La Nina weather event reduced yields in Indonesia and Malaysia, which produce about 90 percent of the world’s supply. La Nina has also caused a drought that curbed South American planting of soybeans, helping drive soybean oil prices to a 27-month high last month.

Higher palm oil and soybean oil prices will cause “biodiesel users to defer purchases till mid-2011 and bring demand in line with supply,” Fry said.

“A crude price of $115 would be needed to justify a crude palm oil price of 3,400 ringgit,” Fry said. Crude oil in New York for January delivery closed at $88 a barrel yesterday. A premium of $700 a ton for biofuel over diesel in the European Union may slash biodiesel sales by 3 million tons, Fry said.

“Barring a catastrophe on the supply side, we will soon see again that the cure for high prices is high prices,” Fry said.

Backwardation Risk

A backwardation in palm oil prices, when near-term contracts are more expensive than those for future delivery, “encourages buyers to defer palm oil imports,” Fry said. Malaysia’s palm oil exports dropped 0.6 percent from the previous month to 1.46 million tons in October, according to data from the country’s Palm Oil Board.

Rising spot prices may erase the premium of soybean oil over palm oil and making the tropical commodity more expensive, Fry said. This will force “importers to turn more to soy oil imports,” creating a backwardation in soybean oil, he said. The soybean oil premium was at $48.63 a ton at 2:17 p.m. in Singapore.

Production Rally

Indonesia’s palm oil output may grow by about 1.8 million tons to 22.8 million tons next year, Derom Bangun, vice chairman of the Indonesian Palm Oil Board, said in an interview today.

Malaysian production may climb 3.4 percent to 18.4 million tons next year as yields improve from maturing trees, the Ministry of Finance said Oct. 15.

Palm oil may extend the current rally to 2,600 ringgit before January on expectations that global demand will exceed supply, Godrej International Ltd. Director Dorab Mistry said earlier at the same conference.

“The period of greatest tightness will be between February and May 2011 and we need prices to rise now in order to rein in demand and to stimulate plantings,” Mistry, who correctly predicted in March that prices would exceed 3,000 ringgit ($953) a ton after June, said at a conference in Bali today.

On Oct. 20, Fry predicted palm oil would drop to 2,500 ringgit a ton by the end of the year, forecasting stockpiles in Malaysia would be 2.25 million tons. October stockpiles were at 1.79 million tons, according to the Malaysian Palm Oil Board.

Prices will decline this month, before rallying as much as 300 ringgit a ton from January to April, Thomas Mielke, executive director of Oil World, said in Bali today.

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