Palm oil futures hit all-time high on bullish global energy, vegetable oil markets

Third-month palm oil futures on the keenly watched Malaysian commodity exchange crossed the MR 6,000/mt ($1,433.52) level for the first time Feb. 23, driven by a mix of rising energy prices, vegetable oil supply concerns, and a sharp overnight rally in CBOT soybean oil prices.

The most active May 2022 palm oil contract on the Bursa Malaysia Derivatives exchange rose 4% to an all-time high of MR 6,043/mt during afternoon trade before closing at MR 5,981/mt for the day.

Malaysia is the second largest palm oil producer and exporter after Indonesia. The two countries account for about 85% of the world's supply of palm oil.

"The developments between Ukraine and Russia are pushing up crude oil prices, which is reflecting on palm oil and soybean oil prices across the world. The additional catalyst is the deteriorating soybean crop conditions in South America," edible oils analyst Subhranil Dey of commodity trading firm Targray said.

Soybean oil futures on the Chicago Board of Trade rose by about 3% on Feb. 22, with the May contract settling above 70 cents/lb at the close, due to soaring energy markets as well as deepening concerns about a shortfall in Argentina's soybean crop due to poor weather.

The strong palm oil exports from Malaysia in February and supply issues in Indonesia created by the Jakarta's domestic market obligation policy continued to support palm oil prices. Along with a shrinking production estimate for the month, end-February inventories could fall below January levels, said Anil Kumar Bagani, research head at vegetable oil brokerage Sunvin Group.

On the destination side, China was quiet in palm oil buying, due to deep negative import margins, though weekly palm oil stocks fell to 340,000 mt from 365,100 mt on the week, although at these high levels prices may not sustain that long, Bagani said.

"At top vegetable oil buyer India, importers have realized the threat and are staying quiet as the import and processing margins for crude palm oil and palm olein have gone from bad to worse," Bagani said.

Volatile outlook

Most trade sources and market analysts believe that palm oil futures will not sustain at these high levels for long.

"Today's rally to beyond MR 6,000/mt mostly due to external factors like Dalian [China's main vegetable oil commodity market]. However, we noticed that the rally is mostly short covering in nature which is reflected in the daily decline in open positions," Paramalingam Supramaniam, director at Selangor-based brokerage Pelindung Bestari, told Platts.

"We expect prices to touch MR 6,250/mt for May and then a sharp correction to follow which can result in us going back to MR 5,150/mt... refiners and processors should only take positions to keep their supply chain going," Vivek Pathak, managing director of Athena Tradewinds, an India-based trading house predominantly dealing in sunflower oil, said in a note Feb. 23.

The price on edible oil is very high and it will become very volatile in coming days, Pathak added.

May palm oil futures on the BMD have risen by about 6% since Feb. 15 when it became the most active third month futures contract. The spot month futures also closed at an all-time high of MR 6,510/mt ($1,555.37) on Feb. 23.