Palm oil markets feel El Nino 'hangover'


The palm oil market suffering an El Nino "hangover", as production rebounds after a long period of drought damage, Commerzbank said.

"For several months, a decline in production that was caused by El Nino ensured upward pressure on prices in the palm oil market," the bank noted.

But now, with production "surprising to the upside," palm oil supplies are weighing on the market, and the situation is only being exacerbated by the heavy stocks accumulated by importers, who bought heavily ahead of El Nino.

Price breaks lower

"The price drop since early June is due to a combination of falling soy prices, higher-than-expected palm oil supply and lower demand," said Commerzbank.

The sharp price rise in palm oil between late summer 2015 and spring 2016 broke off in April

"Since early June, the price movement has been down and palm oil in Malaysia has lost 20% of its value."

Prices in Malaysia fell below 2,200 ringgit a tonne last week.

October palm oil future settled at 2,268 ringgit a tonne on Tuesday.

Rising production

The key driver in plummeting prices is the fact that seasonal uptick in production in Malaysia and Indonesia, which between them supply some 85% of total world output has been faster than expected, Commerzbank said.

Malaysian output up 12% month-on-month in June.

"According to a Bloomberg survey, production in Indonesia also likely rose 12% in June from May," said the bank, following a long term decline after El Nino.

"At the same time as production increases, exports of both countries are decreasing," the bank noted, with Malaysian June exports down 12%, at the lowest level for that month since 2008.

Demand weaker

The latest palm oil export numbers for Indonesia were also disappointing, down 16% month on month in May.

Export demand for Indonesian palm oil took a hit from slowing Indian demand, where stocks are very heavy.

"This stockpiling was due to the fear of an El Nino-induced poor Indian oilseed crop," Commerzbank said.

The bank also noted weak demand from China, the worlds other key vegoil market.

And a delay in the expected increase in Malaysian mandatory biofuel blending, which would boost demand for palm oil for biodiesel production, has put an "additional damper on sentiment".


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