The strengthening El Nino risks driving up palm oil prices as consumers seek supplies on concern output will be crimped by dry weather and producers hold back sales.
“Historically, we’ve seen that in weather markets consumers tend to go long,” said Dorab Mistry, a director at Godrej International Ltd., referring to El Nino and the Indian monsoon. “Producers become reserved sellers because they want to catch any upside. Prices tend to rise. How far they will go will depend on how weather problems develop.” Mistry has traded cooking oils for more than three decades.
While El Ninos have varied in strength, they are known to cause drought in parts of Asia and increased rains in the Americas. Australia says the first El Nino since 2010 shows signs reminiscent of the most severe event in 1997-1998. The U.S. predicts it may last beyond January, while India expects it to curb the monsoon. The weather pattern may hurt crops and boost food inflation, according to Citigroup Inc.
Prices of the world’s most used vegetable oil have climbed 6.4 percent since the start of May to 2,236 ringgit ($604) a metric ton in Kuala Lumpur on Thursday. At the time of the 1997-1998 event, prices doubled in 12 months as output dropped 7 percent in Indonesia and fell 5.5 percent in Malaysia. The countries produce 86 percent of world supply.
“Trading of weather models more than a few weeks out is very problematic,” said Michael Coleman, managing director of RCMA Asset Management Pte, which runs the $250 million Merchant Commodity Fund. “If it does get very dry, then in a few months there’ll be lower palm oil production, but I don’t think I could trade a very big position on that basis.”
Malaysian exports to India, the biggest buyer, almost quadrupled in May from a month earlier, Palm Oil Board data show. Shipments to China climbed 37 percent. Stockpiles at ports in India and in the pipeline were a record 2.25 million tons by June 1, the Solvent Extractors Association said June 12.
Indonesian sales to China rose 40 percent in the past three months from a year earlier, Palm Oil Association data show.
Mistry said it’s not possible to have a strong view on prices because they depend on how El Nino and the Indian monsoon develop. Whether India and China keep buying at the same pace for the next four months and how producers react to rising stockpiles if output remains buoyant will also determine direction, he said in an e-mailed reply to questions on June 15.
So far supply shows no signs of falling. Indonesian output probably increased for a fourth month in May, rising to the highest level since at least 2012, a Bloomberg survey shows. Production in Malaysia has expanded every month since March.
States in Peninsular Malaysia will probably get average rainfall from June through November, the meteorological department said on June 5. Indonesia’s forecaster predicts the impact of El Nino may start to be felt in September.
“It would have to be a very severe El Nino for palm oil to be able to move in a completely different trend from soybean oil and crude oil,” Coleman said in an interview June 16.
Crude in New York tumbled 43 percent in the past year amid a global glut, reducing the appeal of cooking oils as biofuel. Soybean oil in Chicago lost 18 percent in the past 12 months.