Palm oil futures are poised for a temporary recovery, before heading lower next at the start of what will be a long-term decline, weighed by expanding production surpluses, Fitch Solutions said.
The analysis group held its forecast for Kuala Lumpur palm oil futures to average 5,200 ringgit a tonne in 2022, on a third contract basis.
While well below the market consensus forecast of 6,455 ringgit a tonne, as measured by Bloomberg, Fitch’s forecast implied some rebound ahead in futures, which for November stood at 4,165 ringgit a tonne in afternoon deals in Kuala Lumpur on Monday, up 1.7% on the day.
Monday’s gains in Kuala Lumpur prices were attributed in part to a strong performance by soyoil, a key rival to palm oil, in Chicago late on Friday, as energy prices recovered, attracting buying by funds which had been sellers previously last week, according to trader talk.
Cargo surveyor estimates at the weekend for Malaysian palm oil exports as of August 20 were mixed.
Intertek Testing Services reported a 9.1% rise month on month in shipments, accelerating from a 2.8% pace as of August 15, but AmSpec Agri Malaysia recorded a 3.8% fall, double the 1.9% pace of decline as of August 15.
Fitch said that its forecast implied prices averaging a little over 4,750 ringgit a tonne over the rest of this year, supported by fresh demand, which will erode the stocks built up in top producer Indonesia after it unveiled a, short-lived, export ban in April.
According to Gapki, the Indonesian palm oil industry group, Indonesia’s palm oil stocks soared to 7.23m tonnes, up 150% year on year, in May after the export curbs, before easing back to 6.68m tonnes in June after the ban was lifted.
“For the remainder of 2022… we see a slight recovery in the palm oil price from the year-to-date lows seen in July and early-August as the price-led demand destruction that took place in the first half of 2022 is unwound and as Indonesian palm oil inventories start to decline,” Fitch said.
The group foresaw “importers in major consuming nations, such as India and China, resuming or increasing foreign purchases of palm oil having sourced alternative cooking oils earlier in 2022”.
Price reversal ahead
However, Fitch flagged too a “loosening of the aggregate vegetable oils market more generally as indicative of less acute upward price pressure” for the rest of 2022, meaning that highs seen earlier in the year, with palm oil setting a record high of 7,268 ringgit a tonne in March, were unlikely to be tested.
“We do not see a return to the historically elevated price levels evident in the first half of 2022, in no small part as we do not expect Indonesia to reintroduce its short-lived palm oil export ban.”
For 2023, Fitch forecast prices averaging 4,000 ringgit a tonne, below a consensus forecast of 5,900 ringgit a tonne, and also below the futures curve, which foresees prices remaining above that level even out to July 2025, the most distant contract currently live.
In fact, Fitch forecast prices continuing to decline to levels below levels investors are factoring in, pegging the 2024 average at 3,500 ringgit a tonne, 2025 average at 3,000 ringgit, with 2026 values seen at 2,600 ringgit a tonne.
The forecasts reflected expectations of an improved rate of world output growth, after “two consecutive poor global harvests” in 2019-20 and 2020-21.
“We hold the view that the global palm oil market will generate an annual production surplus through to 2026, rising from 2.5m tonnes in 2022 and 2023 to 3.9m tonnes in 2026.”
While output will expand by 3.9% a year out to 2026, consumption will grow by 3.6%, Fitch said.