Palm oil rally likely to fizzle as Ramadan demand fades, harvest supply looms

[KUALA LUMPUR] A rally in the price of palm oil to three month-highs may run out of steam as buying ahead of the Muslim festival of Ramadan fades and markets brace for growing supply as the main harvest approaches, traders and analysts said.

With only around a week left of what is typically the strongest demand period for the tropical oil, analysts said palm was unlikely to climb much beyond its current price of about 2,300 ringgit a tonne, with some saying it might fall. "Near-term crude palm oil prices are likely to weaken as we head into the peak production season in 3Q15," Kenanga Investment Bank said in a note.

The Muslim holy month of Ramadan, which this year begins in mid-June, is marked by communal fasting and feasting that tends to drive up consumption of edible oils including palm and soy in the Middle East and across South and Southeast Asia.

That helped Malaysian palm prices, which set the tone for global prices, climb from their lowest this year at 2,070 ringgit in late April to 2,362 ringgit on Monday. They were also bolstered by increased biodiesel targets in both the United States and Malaysia, the world's No.2 grower of palm behind Indonesia.

Industry data from regulator the Malaysian Palm Oil Board showed exports of palm oil and its products surged 37.3 per cent to 1.6 million tonnes in May, the largest month-on-month rise in 8-1/2 years and ahead of forecasts for a 36.6 per cent rise.

While some buyers could continue to restock in the coming weeks before the Eid al-Fitr celebrations in mid-July that mark the end of the festival month, it is unlikely to be enough to sustain the rally in prices, traders said. Recent prices have stubbornly stayed below this year's peak of 2,400 ringgit, hit in early March.

Some traders noted that despite the growing exports in May, overall consumption of palm oil could have been stronger. "We saw take up, but it was not as great as it used to be four or five years ago," said Lingam Supramaniam, director at Malaysian-based commodities firm Pelindung Bestari. "Prices were low for a while and there was a lot of buying. When palm olein traded above US$630, then demand started softening," he added. "I'm sure they would have bought other vegetable oils." Traders and analysts said that the spectre of the El Nino weather pattern, which triggers crop-damaging droughts in Southeast Asia where nearly all of the world's palm is grown, could offer some support to prices. But any impact was likely to come later, they said. "We view that the El Nino effect on production is only likely to be felt late-2015 to early-2016," said Kenanga.

REUTERS