El Nino's return may spur palm rally amid supply crunch concern

[KUALA LUMPUR] Palm oil may rally should an El Nino weather pattern spur dry conditions across Southeast Asia, hurting output, while key buyers such as China bring forward purchases to guarantee supplies.

Prices may advance to 2,500 ringgit (US$694) a metric ton over the next three months, Maybank Investment Bank Bhd analyst Ong Chee Ting said in a report on Wednesday. That's 12 per cent higher than Tuesday's close on Bursa Malaysia Derivatives.

The return of an El Nino for the first time since 2010 was declared on Tuesday by Australia's Bureau of Meteorology, which said that the event could be substantial. El Nino's influence conditions across the globe and in Asia they can bake Indonesia and Malaysia, the two largest palm oil producers. Planters' stocks including IOI Corp. Bhd. in Malaysia rose on Wednesday.

"In the coming months, we expect palm oil export figures to pick up as end-buyers like China, with its low inventory level, may take a defensive strategy to stock up ahead, on fear of a possible supply crunch," Mr Ong said. While this will boost the palm oil price, the extent of any advance will depend largely on the El Nino's intensity, Mr Ong said.

Palm oil climbed to a five-week high in Kuala Lumpur on Tuesday after the El Nino announcement by the Australian forecasters. Futures were down 0.1 per cent at 2,222 ringgit a ton at the midday break on Wednesday. They last traded above 2,500 ringgit in June.

Palm oil production in Indonesia and Malaysia declined at the time of the last strong El Nino in 1997-1998. The two countries account for 86 per cent of world supplies, according to data from the U.S. Department of Agriculture.

BLOOMBERG