Malaysia Palm Oil Reserves Shrink to 6 Month Low on El Nino

  • Stockpiles drop to 2.31 million tons at end of January: MPOB
  • Declining demand from major buyers may curb palm's rally

Palm oil inventories in Malaysia fell to the lowest in six months in January as El Nino-wrought dry weather exacerbated seasonally low production in the world’s second-largest grower.

Inventories fell 12 percent to 2.31 million tons last month, data from the Malaysian Palm Oil Board showed Wednesday. The median estimate in a Bloomberg survey published last week forecast stockpiles of 2.33 million tons. Crude palm oil production slid a steeper-than-expected 19 percent to 1.13 million tons, the lowest for January since 2011.

Prices of the oil used in cooking and as an alternative fuel surged to a 20 month high last week as delayed effects from El Nino weather conditions that scorched Southeast Asia curbed yields amid a seasonal drop in output. BMI Research Pty expects the weather pattern to help palm oil outperform other so-called soft commodities, according to a Feb. 3 report.

“This is clearly a sign that the El Nino is biting into palm oil production,” Nirgunan Tiruchelvam, director of research at Religare Capital Markets Pte, said by phone from Singapore. “We expect lower output because since 1997, we have not seen an El Nino episode of this severity.”

The lower output will further tighten supplies in the months ahead, he said, forecasting a 20 percent increase in Rotterdam crude palm oil prices to $750 a ton by the end of the year.

Futures for delivery in April closed 0.5 percent lower at 2,567 ringgit ($623) a ton in Kuala Lumpur on Wednesday, retreating from an intraday high of 2,600 ringgit. Prices surged 5.6 percent last week to cap their best week since September.

Supply Squeeze

The decline in production may trigger a supply squeeze in Malaysia and bolster prices to 2,700 ringgit in the second-quarter, vegetable oil analyst Dorab Mistry said at an edible oil conference in Pakistan on Sunday. At the same conference, LMC International chairman James Fry said crude palm oil prices may rise by at least $170 if soyoil fills in the shortfall caused by the weather event.

Still, price gains may be limited should exports continue to decline, according to Selangor-based brokerage Pelindung Bestari Sdn.

“The MPOB numbers are bullish with production dipping almost 20 percent," said Paramalingam Supramaniam, director at Pelindung Bestari. “What’s worrying is the demand. The lower 10-days exports in February, coupled with overnight losses in crude oil may keep the range tight.”

Malaysia’s total palm oil exports fell 14 percent to 1.28 million tons in January, MPOB data showed, against the survey’s estimates for a 9 percent fall. Cargo surveyor Intertek Testing Services figures released earlier Wednesday showed a 23 percent slump in the first 10 days of February to 249,835 tons compared to the same period in January. Investors are concerned the decline may continue into March, Paramalingam said.

Imports dropped 57 percent to 36,642 tons in January, according to MPOB data. Malaysia said last week it will scrap the temporary slowdown on imports announced in October.

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