Crude uncertainties cloud CPO near-term prospects

KUALA LUMPUR: While demand for crude palm oil (CPO) seems to have rebounded, crude oil may be its Achilles heel in the near term if the crude price remains weak due to a global recession.

Looking at the recent export figures released by independent surveyor Intertek, a dip in CPO price could have been a silver lining as demand for the commodity had gone up. In October, CPO exports were 10% higher compared to the previous month.

Intertek said palm oil exports rose to 1.32 million from 1.2 million tonnes shipped out of Malaysia in September. While a significant discount in CPO prices to soybean oil may spur demand for palm oil, its link to crude oil may affect the direction of CPO prices in the short term.

While others were starting to look at a rebound to the US$90 to US$100 (RM321.30 to RM357) per barrel range for crude oil, RHB Research is taking a different view for the short term, with crude possibly dipping further in light of more weakness in demand.

“Crude oil prices are likely to trade even lower in the short term, possibly overshoot to US$50 a barrel level, which will be closer to the investment hurdle rate for long-term infrastructure projects in the short term, before stabilising between US$60 and US$70 a barrel in the medium term.”

However, industry players opined that CPO’s significant discount to competing soybean oil could see a demand shift in edible oils to CPO. Kuala Lumpur Kepong Bhd’s marketing director Nicole Khoo said palm oil was already at a great discount of more than US$200 to soybean oil.

“CPO is the cheapest of edible oils and when there is a talk of a slowdown, palm oil would be more attractive although uncertainties in global markets have trickled into commodities,” she told The Edge Financial Daily recently. CPO was then trading above RM1,500 a tonne.

Hap Seng Plantations Holdings Bhd group managing director Datuk Edward Lee also agreed that demand for CPO would drive the commodity. “We believe this is a short-term market correction for CPO and we remain confident that demand will continue to drive the pricing for this commodity in the long term.”

“Moreover, fast-growing economies such as India and China have also ensured a healthy demand for this commodity as they represent the two biggest importers of Malaysian palm oil,” he said recently.

As at 4pm last Friday, CPO for January contract was RM45 lower at RM1,515 a tonne on Bursa Malaysia Derivatives while oil was down US$1.81 to US$64.15 a barrel on the New York Mercantile Exchange at 3.23pm.

Nevertheless, RHB Research said a further decline in oil to US$50 a barrel would see CPO trading at RM1,300 to RM1,350 a tonne.

“Weakness in crude oil and vegetable oil prices in general stem from the ever-widening expectation of a global recession which would not only impact demand for crude oil and vegetable oils, but also result in a continued unwinding of speculative trades on commodities in general,” it said.

Although the weakness in oil prices would see supply cuts by the Organisation of Petroleum Exporting Countries (Opec), the lower price range would persist until economic growth regains positive momentum in 2010, it said.

Malaysian Industrial Development Finance Bhd’s subsidiary MIDF Amanah Asset Management Bhd’s chief investment officer, Mushthaq Ahmad, recently said oil prices could head lower in the next six months as global economies worsened.

“However, this would be a time where real demand for oil surfaces. Growing economies such as China and India, they are not going away as they still like to use fossil fuel,” he said.

by Lim Shie-Lynn - www.theedgedaily.com