Crude palm oil (CPO) futures are enjoying a crude oil-led rally. With the crude oil price now trading around $70 per barrel, the continuation front-month CPO benchmark future on the Bursa Malaysia Derivatives exchange settled today at a 10-year high of Ringgits 3,918 ($952.13) per tonne, the highest since February 2011.
The immediate prompt for a higher crude oil price was the weekend drone-and-missile strike on oil facilities in Saudi Arabia, which appeared to have done little damage. It was also a response by last week’s surprise decision of Opec+ - the group of 24 oil-producing countries - not to relax supply curbs but to maintain them through March.
Other commodities and CPO
The CPO price of course is heavily dependent on a wide range of agricommodity factors, such as competing vegetable oil prices.
One such is the probable demand for CPO by India, the world’s biggest importer, which is very price-sensitive. While palm oil shipments to India fell in February to some 400,000 tonnes, the country has been easing its Covid-19 lockdowns and people are returning to hotels and restaurants. Some traders are forecasting demand for palm oil imports could rise to 600,000 tonnes in March and April.
Malaysia’s labour problems
Malaysia, the world’s second-biggest CPO producer (after Indonesia) is still struggling with finding sufficient numbers of migrant workers to tend and harvest its palm oil trees. The country is only now starting to relax its "movement control order".The key production state of Sarawak has now re-opened to migrants.
For each year of Malaysia’s Covid-19 pandemic movement restrictions 12 associations representing the Malaysian CPO industry now estimate that the CPO sector loses around Ringgits 12bn (about $3bn) of revenue and more than $1bn of profits, based on an assumed price of Ringgits 3,000 ($730) per tonne.
Malaysia’s CPO workforce depends on some 70% migrant workers from neighbouring countries. The absence of many of these in 2020 saw an estimated annual loss of 3.43m tonnes of CPO. Will those 30,000-plus absentees return? And how fast? CPO production reaches its peak in June; Malaysia is now facing a second successive year of substantially lower output.
There is also the continued drive by both Malaysia and Indonesia to raise their local biodiesel mandates, which depend on CPO.
Indonesia aims to implement its B30 diesel - blended with 30% palm oil content - this year and B40 by 2022. Malaysia’s lower, B20 mandate has now been pushed back for a second time, to now go nationwide at the end of 2021.
The investment bank Goldman Sachs believes that the crude oil price will reach $75 a barrel in the third quarter of this year, on the wider economic recovery. Goldman also expects global oil demand to recover to pre-pandemic levels of around 100m barrels per day by August this year.
Based on such propitious fundamentals there is good reason to consider that CPO prices are unlikely to weaken. Demand for all types of vegetable oils is recovering, and with such a bullish outlook for crude oil prices both Malaysia and Indonesia will want their biodiesel mandates to move as fast as possible.