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The outlook of plantation sector in 2016 does not look promising at all, one of the major headwind faced by the sector is the stubbornly high stockpiles. As we approaching the February window, production tend to slowly increase until October. This does not bode well to the CPO prices. But, last year Malaysia and Indonesia both countries were facing the worst El Nino since 1997 and many experts opined that it will impact the output growth up to -7%. For this, we expect the growth to be stagnant to slightly negative.

Export has been slowdown significant in November, fell 12.4% mom. The export data in December by Intertek also paint a bleak picture. The demand from India on edible oil will slow or remain flat in the near future as they have been build up the stockpiles aggressively while the price was low. China on the other hand is facing economy slowdown and they will just cut down the size of edible oil consumption as well. Therefore for the 1H2016, export will be weak until we approaching the deepavali festival in 2H016 where India will start import palm oil again.

Low crude oil pries will also impact the price of edible oils like palm oil and soybean oil as they are correlated. Currently we see a divergence of trend between the price of crude oil and soybean oil as per chart below. So, we expect the soyoil and palm oil to turn down in tandem of the overall trend of crude oil price. Furthermore, low prices of crude oil will make biodiesel less viable as petrol price become cheap.

Based on the chart, the palm oil futures uptrend for the past few month does not look impulsively at all. Once it break the uptrend line, watch out for the downside. The only wildcard here is the ringgit, any weakening of ringgit will help to support the price as it becomes cheaper against soyoil.

To sum it all up, no strong catalyst that suggest the uptrend of CPO prices will continue in 1H2016 and hence plantation sector set to look gloomy in 1H2016. For those aggressive speculators, look to short crude palm oil futures when it break the uptrend line at 2420.