Price level based on likelihood of another El Nino

KUALA LUMPUR: Leading industry analyst Dorab Mistry has outlined three possible scenarios for crude palm oil (CPO) prices this year, and placed his bet on prices hovering in the region of RM3,000 per tonne until the fourth quarter of this year.

This, he said, was based on the “bullish scenario” that was based on the impact of weather conditions, and the possibility of another El Nino developing in South-East Asia by June this year.

The first scenario, which called the “normal scenario” was based on supply and demand.

“Stocks are still very tight, the inverse has been eroded and palm has once again become competitive.

“In fact I am optimistic that prices will again go up to RM3,000 and after June, possibly July, it may go down,” he said.

The assumptions, he said, were made with the expectation that Brent crude oil would be between US$45 and US$65 a barrel, there would be three rate hikes by the US Federal Reserve, and that currencies of the developing countries will stabilise.

On the alternative bullish scenario, which he said was his preferred scenario, he noted that climate was becoming increasingly uncertain.

“What if the recovery in palm oil production gets postponed?

“What if Malaysia produces only 18.7 million tonnes and Indonesia only 33 million tonnes?

“In this case, CPO will hold at RM3,000 until September, dip for a few months and then take off again,” Mistry said during the annual Palm and Lauric Oils Price Outlook Conference & Exhibition 2017 here.

The third scenario relates to the US government encouraging repatriation of profits held overseas by its companies.

“The Donald Trump administration is toying with the idea of giving an advantageous 10% tax incentive to repatriate and bring this money back to the US.

“There is about US$2 trillion of untapped US company profits lying outside the country.

“If this policy is announced, it is almost certain that US corporations will take advantage of it and bring their money back,” he said.

Such a tremendous drain of liquidity from emerging countries, he said, could push some countries into recession apart from being extremely bearish for all commodity prices.

“At this stage my feeling is to go with the bullish scenario.

“I feel that the impact of weather is so important, and I expect palm oil prices to remain in the region of RM3,000 for the next six to eight months,” he said.

Earlier, palm oil industry expert James Fry said CPO prices at the end of this year would be similar to the level it traded for most of 2014 and 2015, assuming Brent is at US$55 and the ringgit at 4.45 per US dollar.

“The CPO price is set by crude oil where shale from US and Opec are having a tug of war.

“I believe that the response from shale oil will cut Brent to about US$55 a barrel,” he said during the presentation of his paper titled Lessons from the latest El Nino and La Nina – The implications for Prices.”