We believe palm oil should start trading higher, especially after its price has recovered above the MYR2,400  level.  The current hot and dry spell in Malaysia, due to the southwest monsoon that is expected to  persist until  September,  will  hurt  palm  oil  production  –  much  like  in  Jan-Feb this  year.  Also,  tensions  in  Iraq  are  boosting  crude  oil  prices  and biodiesel margins, which will increase demand. Maintain OVERWEIGHT.

• No  El  Nino  just  yet.  The  current  dry  spell  and  soaring  temperatures caused by the southwest monsoon  is expected to last until September. Although  not  caused  by  the  widely-anticipated  El  Nino,  signs  may  be emerging  to  indicate  that  the  El  Nino  heat  wave  has  started  to  reach some parts of Indonesia, as rainfall has begun to diminish.
• Indonesia’s  biodiesel  progress  slower  than  expected.  According  to Indonesia’s  Energy  &  Mineral  Resources  Ministry,  its  volume  of subsidised fuel will hit 1.32m kiloliters (kl), or 90% of its 1.46m kl target due to poor distribution infrastructure.  We expect better progress going forward and the weakness in the subsidised portion to be compensated by its non-subsidised portion and export demand.
• Increase  in  inventory.  Malaysia’s  palm  oil  inventory  rose  to  1.84m tonnes last week  –  a marginal 1% growth  y-o-y. Meanwhile, Indonesia’s stockpile is said to have increased to  an  8-month high,  at 2.2m tonnes. We  believe  the  increases  will  not  be  sustained  at  the  current  pace  as inventory at destination markets  is likely to be low after months of slow purchases. Palm oil shipments to India, for example, surged 22% m-o-m in May, indicating that restocking activities have begun.
• Iraq tensions widen biodiesel margin. Tensions in  Iraq have driven up the price of crude oil, which should  trigger a  boost  in palm oil demand, given its usage of biodiesel. The margin for biodiesel production is now at  USD18  per  barrel,  up  from  USD14  a  week  ago  based  on  our estimates.
• Maintain OVERWEIGHT. We maintain our view that the price weakness of the  past week  represents  a correction within an uptrend as catalysts are in place to lift palm oil and plantation stock prices. 

Source: RHB