Palm oil price rally not sustainable

palm oil

KUALA LUMPUR (July 24): Palm oil prices will fall by the fourth quarter due to higher output and inventory levels, two leading industry analysts told Reuters, dampening a rally that sent the tropical oil to a five-month high this week.

The benchmark palm oil contract has gained 40% in the last 11 weeks, helped by concerns over tighter supply from top producers Indonesia and Malaysia, and signs of increasing demand.

The output peak has shifted to the fourth quarter due to heavy rains in Indonesia, said James Fry, the chairman of consultancy LMC International, adding that he expects a higher inventory towards the end of the year.

“Unless you feel very bullish about Brent, current crude palm oil prices cannot be sustained going towards the fourth quarter, when stocks will be at their seasonal peak,” Fry said.

Palm oil prices are linked to the crude oil market due to growing use of the commodity in making renewable fuels, analysts have said.

Crude oil prices have fallen sharply this year due to the Covid-19 pandemic-induced slump in demand.

Fry said he now expects peak the inventory level in Malaysia to be near 2.9 million tonnes, down from his earlier forecast of three million tonnes, due to a pickup in demand after the easing of Covid-19-fuelled restrictions in some countries.

Meanwhile, analyst Dorab Mistry said prices could be sustained if crude oil prices rise, but fundamentals are generally bearish for palm oil in the last quarter.

“If Brent crude, on the other hand, remains around US$42 (RM178.82) per barrel and palm production follows its usual seasonal trend for Q4 (the fourth quarter), then current palm prices are simply too high and will need to fall.”

Brent crude closed at around US$43 per barrel yesterday.


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