Investors should "buy the dip" in palm oil futures, Standard
Chartered said, blaming a slump to three-year lows this week was based on a
mistaken interpretation of output data, and foreseeing a jump of one-third in
"There are overwhelming indicators to suggest that crude
palm oil is on the cusp of a move higher," StandChart analyst Abah Ofon said,
as Kuala Lumpur futures on Friday extended their recovery, closing 2.7% higher
at 2,415 ringgit a tonne.
Mr Ofon acknowledged "a number of" downbeat developments for
prices, whose near-20% slump over the past month has been blamed on soft
Malaysian exports at a time when production should be at its seasonal high.
However, "the bearish sentiment is overdone.
"Prices are due for a significant upward correction."
Mr Ofon said that fears over Malaysian production may be
overdone, despite a rise in yields to above-average 1.69 tonnes per hectare in
July, with production actually peaking in August rather than, as usual, in
It was a "tall order" to meet official forecasts of
full-year output of 18.4m tonnes, "considering that oil yield tends to moderate
in the latter half of the October-to-December quarter", he said.
Furthermore, inventories in Indonesia, the world's biggest producer
and exporter, will fall by some 1m tonnes by the close of 2012 from levels of
3.2m tonnes at the end of August.
As extra fillips, low prices are likely to spur demand,
particularly from China ahead of the Lunar New Year celebrations in February, while
comparison with mineral and vegetable oil markets supports the case for buying
palm oil too.
Against gasoil, to which palm oil is correlated as a
feedstock for biodiesel plants, the vegetable oil's price discount "is
approaching a historical low and is near the level at which we would expect the
market to correct", Mr Ofon said.
The discount to rival vegetable oil soyoil widened by 27% in
the week to Wednesday, when Kuala Lumpur palm oil for December hit 2,230
ringgit a tonne, the lowest for a benchmark contract since November 2009.
"Risks to prices are to the upside. While the timing of this
move is uncertain, we firmly expect to hit our 3,250-ringgit-a-tonne target in
the [current] fourth quarter."
A value at that level would represent an uplift of 34% over the December lot's closing price on Friday, or of 29% over the closing price of the February lot, which will take over as the benchmark contract later in the quarter.
However, some other analysts have taken a more cautious view
of price prospects.
Australia & New Zealand Bank has flagged the need for
confirmation that low values have stimulated purchases of the vegetable oil
and, shorter-term, highlighting the importance of signals from Dalian palm oil futures
when Chinese markets reopen on Monday from a week-long holiday.
And official data on Wednesday will show Malaysian palm oil inventories
hitting a record 2.46m tonnes, investors believe, according to a ThomsonReuters
Production is seen hitting nearly 2.0m tonnes last month,
well above exports of some 1.5m tonnes.