Vegetable oil market sentiment: CPO on a rally amid Black Sea tension

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Bisnis Indonesia

3 November 2022

By: Sri Mas Sari

Jakarta – Russia’s decision to withdraw from the agreement on the Ukraine export corridor via the Black Sea is triggering the rally of crude palm oil (CPO) that was previously boosted by weather disturbances and Malaysian ringgit weakening.

The uncertainty of the export corridor agreement for agricultural products from Ukraine is causing doubts for the continuity of supply and safety of the sunflower oil distribution route from Ukraine.

“This situation is a positive catalyst for vegetable oil prices. As the substitute product, the increase in vegetable oil prices is also positively impacting the CPO price,” Indonesia Commodity and Derivatives Exchange Research and Development Girta Yoga said on Wednesday (2/11).

CPO that will be distributed in January 2023, the most active contract in Malaysia Derivatives Exchange, surged by 3.9% to 4,400 ringgit per tonne when trade closed on Wednesday (2/11).

The tropical oil that can be used for various purposes, starting from margarine, ice cream, as well as shampoo, surged by 25% last month amid the threat of supply weakening due to flood that can disturb harvest in palm oil production centres and demand optimism.

On the other hand, CPO from Indonesia, the main producer, is increasingly attractive after the government has extended the export levy waiver despite increasing the reference price.

Indonesia is continuing the export levy waiver until the end of the year as long as the benchmark price used to determine the levy stays under US$800 per tonne. The government increased the CPO reference price by 8% to US$770.88 per tonne for the first two weeks of November.

“Crude palm oil from Malysia is currently attractive [thanks to ringgit weakening]. However, demand for refined palm oil products will decrease due the cheaper alternative from Indonesia,” Paramalingam Supramaniam, Broker Director of Pelindung Bestari Bhd that is based on Selangor, said as quoted by The Edge Markets.

Demand prospect

The palm oil market is also rallying in the Chinese market, including vegetable oil, as there is a speculation that policymakers there are preparing to gradually get out of the strict Zero Covid policy, which is the largest concern for investors.

Refined palm oil for January at Dalian Commodity Exchange surged by 4.5%, while soybean oil increased by 2.8%.

However, Supramaniam continued that demand could decrease in the last few months of this year due to winter in the northern hemisphere. Palm oil tend to thicken in colder temperatures.

A different perspective was stated by Girta. According to him, there are several positive catalysts that can make CPO continue to improve until the end of the year.

The catalysts include the Indonesian CPO export acceleration program, biodiesel program development in Indonesia, high rainfall in major CPO producing countries that can cause flood and disturb the harvest and production process, as well as developments on the Black Sea route.

Meanwhile, in terms of demand, the indicators observed include the Covid-19 situation development in China and the policy change regarding import tariffs for vegetable oil and CPO in India.

ICDX sees that CPO resistance is around 5,000-6,000 ringgit per tonne in the fourth quarter of 2022, while support is around 2,000-3,000 ringgit per tonne.

CPO previously skyrocketed to surpass 6,000 ringgit per tonne in April, some time ago after the Russia-Ukraine war occurred that tightened the global vegetable oil supply.

Indonesia’s decision to ban palm oil export worsens the supply. Currently, the CPO price has decreased by 33%, but it is still 8% stronger than the position at the start of the year.

Meanwhile, quoted by Bloomberg, the cooking oil supply prospect will be a hot topic at Indonesian Palm Oil Conference (IPOC) held 3-4 November after Russia affirmed their participation in the Ukraine export corridor pact.

Ukraine contributed almost 50% of the global sunflower oil export before the Russia-Ukraine war occurred at the end of February. The war halted supply.

Other topics discussed include uncertain weather, vegetable fuel continuity when food costs reach sky-high, and the Indonesian government’s policy that shook the market by temporarily banning export. 

Dorab Mistry analysts, James Fry and Thomas Mielke, will present their perspective.