A higher-than-expected surge in demand combined with weak production following the El Nino weather phenomenon earlier this year, sent front-month crude palm oil prices rallying to a 2016 high of MR2,845/mt, or $708.19/mt, on the Bursa Malaysia on August 26, according to the latest palm oil sector note released late Friday by Malaysia's CIMB Bank.
The sharp spike in prices caught market participants by surprise as they had underestimated the recovery in demand from India and China, and narrowed the CPO price discount against soybean oil to $60/mt at end-August against a historical average of $140/mt, added the note.
Due to strong pre-festival demand from India and China, Malaysian August palm oil exports rose by 26.9% month on month, based on cargo estimates from surveyors SGS and ITS, said the note.
The month-on-month rise in exports was higher than CIMB's earlier projection of a 5% rise. Chinese demand, in particular, was driven by the government stopping the release of its strategic rape oil reserves, it added.
Meanwhile, the El Nino weather phenomenon seen earlier this year continued to impact Malaysia's palm oil production, which rose 5.4% month-on-month in August -- much lower than the five-year August average of a 6.4% rise, the report said.
CIMB had earlier forecast production to rise about 8% month on month in August.
Peninsular Malaysia and Sabah production rises were lower than Sarawak increases, it added.
Higher demand and lower inventories are expected to pressure Malaysian CPO stocks to drop by 18% month on month to 1.45 million mt at end-August, the CIMB said.
CPO prices would remain quite firm during September and trade in the range of RM2,500-RM2,700/mt, the CIMB forecast.
