Upward pressures in prices would likely be countered by narrowing of the gap between the soybean oil values and CPO
Global crude palm oil (CPO) futures are expected to rise only slightly this year despite the onset of the El Nino weather pattern and higher oil prices, Fitch Ratings said on 7 July.
“Fitch expects the narrowing price spread between CPO and soybean oil and the lack of growth in demand for biodiesel in Indonesia to restrain upward trends in CPO prices,” the ratings agency said in a statement.
The El Nino weather pattern is expected to bring about extreme heat and drought, which will negatively impact production volumes and could boost the average selling prices for CPO, according to Fitch.
Concerns about the military action in Iraq and its potential disruptive impact on oil field operations have put upward pressure on global oil prices, according to the firm.
“Given the high correlation between CPO and crude oil prices, this could drive up CPO prices,” Fitch said.
The average prices of CPO rose by 5% year on year in January-May this year, partially reflecting the market’s anticipation of the El Nino pattern, which may develop by September, a little later than the initial estimate for July-August, it said.
“Historically, a severe El Nino would result in a 10%-15% drop in CPO production volume, and a 30%-40% increase in average selling prices,” Fitch added.
However, upward pressures in CPO prices would likely be countered by the narrowing of the gap between the soybean oil values and CPO, according to the ratings agency.
Soybean oil is a substitute for CPO and a good harvest in major producer the US, which is forecast to export 1.75bn pounds of soybean oil in 2014, has pushed the price of soybean oil down, shrinking the premium over CPO prices to an average of $9/tonne in January-May 2014 from $244/tonne last year, it said.
In addition, Indonesia’s demand for CPO for blending into biodiesel has not risen so far this year compared with 2013, Fitch said.
The blending of CPO into biodiesel is hampered in the short term by underdeveloped distribution infrastructure and the high cost of CPO. As a result, higher CPO stocks are also weighing on selling prices, it said.
“In Fitch’s view, an average CPO price of about $800/tonne would reflect supply and demand fundamentals,” the firm added.