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Weakness to stay due to bearish supply fundamentals (An oil palm factory in Malaysia - File pic)

KUALA LUMPUR: High crude palm oil (CPO) stock levels have made prices volatile, with fears of the sharp price correction in commodities like wheat could trigger contract washouts and further exacerbate the price downtrend.

The benchmark CPO futures contract (FCPO) hit limit down or RM439 lower to a one-year low of RM3,735 a tonne in early trade yesterday on Bursa Malaysia Derivatives before late buying saw the contract recover to close RM117 lower at RM4,057.

Jittery trading saw the spread between the “ask” and “bid” stretch to RM6-RM7 from the usual RM1 spread in normal trading days for the three-month forward contract.

CPO prices are down 37% since June 8 when the main FCPO contract closed at RM6,464.

CGS-CIMB Research regional head of plantations Ivy Ng expects the price weakness to persist in the near term partly due to bearish supply fundamentals.

CGS-CIMB Research regional head of plantations Ivy Ng expects the price weakness to persist in the near term partly due to bearish supply fundamentals.

“There is a possibility that CPO could fall below the RM4,000 mark this month and remain weak until Indonesia’s palm oil stocks fall to between four million and five million tonnes from as high as eight million to 8.5 million tonnes at end-June,” she told StarBiz.

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In comparison, Indonesia’s palm oil stocks stood at 6.1 million tonnes and 3.6 million tonnes at end-April 2022 and December 2021, respectively.

Ng said changes in Indonesia’s export policy in the first half of this year has led to its palm oil stocks to rise.

The price trajectory has been down since Indonesia, now the world’s largest CPO producer, removed its export ban on May 23.

CGS-CIMB Research, in a note, said the bulk of the price decline in the vegoil has been since June 10 after Indonesia provided more clarity on the export process as it replaced the export ban with the domestic market obligation (DMO).

The DMO requires firms to supply a portion of their products to the domestic market via the government’s bulk cooking oil programme, and links DMO volumes to their export permits and quotas.

That will cause CPO to trade at larger discounts over competing edible oils until Indonesia clears its excess stock levels, it said.

“To clear the excess stockpile, Indonesia’s palm producers will need to entice buyers by lowering CPO prices – causing local and international CPO prices to fall significantly in recent weeks,” it said.

Singapore-based Palm Oil Analytics owner Sathia Varqa told StarBiz the FCPO contract is likely to find support at above RM4000-a-tonne levels as the price sees a shortlived recovery by mid-July, spurred by bargain buying and lower July production outlook after a strong yield performance in March spilled over to May.