Rabobank was neutral to slightly bearish on palm oil prices in its February commodities update released earlier this week amid falling production due to the El Nino weather effect due to a lower demand forecast and declining differential between palm oil and soy oil on the Chicago Board of Trade.
"[We are] still slightly below the futures curve," Pawan Kumar, director of Food and Agribusiness Research Advisory at Rabobank, said although palm oil prices have gone up on the Bursa Malaysia exchange.
The report said that palm oil prices were likely to remain supported into the second quarter due to the weather as well as low seasonal production during January and February.
In fact, constraints in palm oil production have impacted short-term prices on Bursa Malaysia. They have risen about 8% to MR2,548/mt, or $606.67 using a ringgit-dollar exchange rate of 4.2 in February.
Palm oil were expected to average around MR2,500/mt in Q2, it added.
Another major factor lending support to palm oil prices is the inventory drawdown reflected in Malaysia Palm Oil Board's data.
Palm oil production declined 19% to 1.13 million mt in January, from 1.4 million mt in December 2015, a 11-month low, MPOB data showed. Meanwhile Malaysian palm oil stocks fell to 2.3 million mt in January from 2.63 million mt in December 2015, though they were still 30% higher year on year.
Indonesian palm oil stocks declined more in January to 2 million mt, Rabobank said. The report forecast a fall in Indonesia's stocks despite expectation of renewed production from March.
More rain is forecast in the second half of the year that will boost production, pushing down prices. However, the report does not rule out a reappearance of the El Nino weather effect in the later part of 2016.
While the main palm oil producers have exported large volumes since October, the report said demand was expected to fall.
Chinese imports were high but a rationalization is expected after the Lunar New Year due to adequate port inventories. Indian imports declined, however, falling 12% month on month in January. But Indian imports are expected to stay above 600,000 mt/month in the coming months.
The narrowing discount for palm oil compared to soy oil from $138/mt in January to $98/mt in February will affect demand since when the differential is narrower, importers tend to switch to soy.
