ZLBT Chats

Sunday, March 7, 2010

Palm oil’s discount to soyoil should widen, say analysts

Cash palm oil products should start widening their discount to soyoil as Malaysian palm oil futures have not fully taken into account prospects of higher supplies, a top analyst said on Saturday.

Still high palm oil stocks in Malaysia, rising production in its rival and top palm oil supplier Indonesia and an expected record South American soy crop have not quite been priced in, said James Fry, chairman of LMC International.

“There is an awful lot of palm oil. Indonesia is coming in every year with an additional 1.5-2.0 million tonnes of production,” London-based Fry told Reuters in central Malaysian city of Shah Alam ahead of a key industry meeting next week.

The three-day Bursa Malaysia Palm oil Conference in Kuala Lumpur starts on Monday and is expected to draw in hundreds of analysts, traders and planters.

Fry said the gap between the two vegetable oils should widen to “a normal” $150 a tonne but did not give a time frame.

Refined palm olein from Malaysia last week traded at $827.50 a tonne free on board (FOB), just $12.50 cheaper than Argentine soyoil, traders said.

Benchmark palm oil futures on the Bursa Malaysia Derivatives Exchange has instead been pricing in fears of El Nino-driven hot weather and labour shortages curbing production and higher crude oil prices.

“Malaysian stocks are still high for the moment but they would fall seasonally. I am looking at 1.4-1.5 million tonnes in June and July,” Fry said.

A Reuters poll of plantation firms had pegged February palm oil stocks at 1.90 million tonnes ahead of industry regulator Malaysian Palm Oil Board releasing the data on Wednesday.

If markets start to price in ample palm oil output and take into account that crude oil prices could come under pressure on still high US inventories, then palm oil could narrow its already high premium to Brent crude, Fry said.

“CPO premium has recently gone above the average $250 a tonne. We are being unnecessarily bullish about palm oil,” he said.

“We also need to consider looking at the prospects of crude oil supplies growing with Iraq opening its oilfields, higher prices now spurring exploration and drilling.”


CPO Variance Formula

(Soy Oil May x MT) - ( CPO Benchmark / USD-MYR Exchange Rate)
(o.4005 x 2204.62) - (2670 / 3.36050)
(882.950) - (794.525) = 88.425 Variance

CPO Variance Table

Below 84 SELL

85 >>> 94 Neutral

Above 86 BUY


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