The growing premium of palm oil over gasoil represents a, rare, hurdle to further price gains, VSA Capital said, as futures in the vegetable hit a two-year high, boosted by a surprise fall in Malaysian inventories.
Kuala Lumpur palm oil futures for January closed on Monday up 2.1% at 2,627 ringgit a tonne, the highest finish for a benchmark contract since November 2017.
The gains – which took to 5.7% price headway this month, following 16.4% gains in October, on a benchmark contract basis – followed Malaysian Palm Oil Board data showing that Malaysia’s inventories of the vegetable oil fell by 100,462 tonnes last month to 2.35m tonnes.
Investors had expected the data to show an increase in inventories in the country, the second-ranked palm oil producer and exporter, of more than 67,000 tonnes month on month.
Indeed, the statistics were viewed broadly as bullish for palm oil prices, thinking which received further support from data from cargo surveyors showing a strong start to November for Malaysian exports of the edible oil.
AmSpec Agri put Malaysian shipments for the first 10 days of November at 9.3% above those for the same period of October, with ITS reporting a 19.7% rise.
However, VSA Capital, while saying it was “hard to rule out further [prices] gains following” Monday’s data flagged the mounting premium over gasoil – the much-watched “pogo” spread, which is important for a commodity, such as palm oil, used largely in making biodiesel.
“The only negative on the horizon [is] any potential delay for biodiesel blending demand following the switch in biodiesel economics,” VSA head of research Ed Hugo said.
“Palm oil moving to a premium over gasoil has in the past slowed down the roll-out of biodiesel blending efforts and reduced discretionary blending,” although this had occurred “particularly when the CPO [crude palm oil] premium over gasoil exceeds $100 a tonne”.
At Monday’s closing price, Kuala Lumpur palm oil futures were worth $634.22 in dollar terms, more than $60 above the $573.75 a tonne at which January gasoil futures were trading.
Mr Hugo also noted the narrowing discount of palm oil to rival soyoil, a gap which “now stands at circa $80 a tonne from around $130 a tonne this time last month”.
Exports up, production down
The weaker-than-expected Malaysian stocks data reflected in part a stronger-than-expected export performance last month, with the MPOB putting shipments at 1.64m tonnes, up 231,720 tonnes from October.
Investors had expected growth in shipments of some 184,000 tonnes.
However, production, at 1.80m tonnes, also fell short of forecasts for what is often Malaysia’s peak month for output.
Indeed, it fell by 46,553 tonnes from October, rather than growing by some 37,000 tonnes as investors had expected.
“Once more, the forecast miss [in production] has been attributed to dryness and prolonged haze in key regions, which has impacted yields,” Mr Hugo said.