Palm oil futures crossed the MYR2,700 mark for the first time since Sept 2012.  Although  Pertamina’s  second  biodiesel  tender  results  were disappointing, we see improved pricing and find comfort in the fact that it will still use up 1m tonnes of palm oil this year.  More importantly, the Southern  Oscillation  Index  (SOI)  has  started  to  fall  and  soybean speculative net long indicates a surge in bullishness on soybean. Palm  oil  price  at  16-month  high.  Palm  oil  futures  rallied  past  the MYR2,700 per tonne mark yesterday to its highest level since Sept 2012. We believe the rise was due to a combination of inventory downtrend, increasing bullishness on soybean and a steep decline in the SOI.

• Shrugging  off  Pertamina  disappointment.  Indonesia’s  national  oil company only  managed to secure 2.4m kilolitres (kl) of biodiesel out of the intended 5.3m kl. Based on what was secured, Pertamina will use up 1m  tonnes  of  palm  oil  biodiesel  per  year.  This  was  somewhat disappointing  although  pricing  was  at  the  Mean  of  Platts  Singapore (MOPS)  as  we  expected.  Nevertheless,  Pertamina  indicated  that  it  will hold further tenders to meet its targeted blend.  
• Inventory on  a decline.  Palm oil inventory has started  its downcyle  as evidenced  by  a  decline  in  Malaysia’s  January  stockpile  to  1.934m tonnes. With production continuing to decline in February and shipments rising  (up  27%  m-o-m  for  the  first  15  days  of  February),  inventory drawdown will accelerate. We expect inventory to decline further to 1.5m tonnes or less by April/May, which will help boost  the  palm oil price. The supply  tightness  will  narrow  palm  oil’s  discount  vs  soybean  oil  to  zero (from USD45/tonne currently).
• Bullish  soybean  bets  increase.  The  rise  in  speculative  net  long position for soybean suggests that the South American  bumper crop will be  well  absorbed.  This  should  alleviate  concerns  about  soy  weighing down palm oil prices.
• Maintain  OVERWEIGHT.  We maintain our bullish sector view with key BUY  ideas AALI, First Resources, IOI Corp and Bumitama. We also like Sarawak Oil Palms following its recent stock price decline.
• Climate models predict the El Nino threshold to be hit by July
• Average palm oil price has room for increase
• The spread between soybean oil – palm oil spread has started to narrow

El Nino  concerns to rise.  Given a  steep decline in the SOI, we believe  the  palm oil market has possibly started to react to a potential El Nino in the months ahead. If the market  was  not  concerned  about  El  Nino  earlier  when  the  weather  authorities (Australia’s Bureau of Meteorology and Climate  Prediction Centre  in the US) started warning  about  it,  it  was  because  the  SOI  was  rising  and  hence  did  not  warrant concerns yet. We believe  the market will start  to react earlier than the indicated July timeline as drought will begin some 3-4 months ahead of the official El Nino.

MYR2,700  per  tonne  assumption  for  now.  YTD  palm  oil  price  based  on  West Malaysia  physical  price  of  MYR2,551  per  tonne  is  still  below  our  MYR2,700 assumption,  while  third  month  futures  price  is  at  MYR2,582.  Nevertheless,  with futures price crossing MYR2,700 yesterday, our average price assumption appears very achievable. We have yet to factor in the El Nino impact.

Source: RHB