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Friday July 17, 2009

Break in CPO, crude oil link in few instances

By ELAINE ANG


PETALING JAYA: Crude palm oil (CPO) price is generally still tracking crude oil price but may have decoupled in certain instances due to demand and supply as well as market forces, say analysts.

An analyst from Kenanga Research believes that CPO and crude oil prices will continue to be loosely tied to each other, especially since the former is used as feedstock in the production of biofuel.

“There was a divergence in mid-May when CPO price surged to about RM2,800 per tonne but oil was only about US$58 per barrel.

“CPO price has been on the uptrend since the end of last year due to a drop in inventory – from about two million tonnes in December 2008 to 1.3 million in April 2009,” he said.

For CPO and crude oil prices to be in tandem with each other, CPO at RM2,800 per tonne will translate into crude oil price of about US$109 per barrel.

An MIDF Research analyst concurs: “Any decoupling in future will be shortlived. Historically, whenever there is a big move in crude oil price, other commodities normally follow suit,” he said.

Another analyst from a local investment bank has a different view.

He believes that CPO price has rebounded way ahead of crude oil price from late last year until early this year. To him, for CPO and crude oil prices to be in tandem with each other, the current CPO at RM2,100 per tonne will mean crude oil at US$80 per barrel, instead of about US$60 per barrel at present.

“I don’t see the prices re-coupling yet due to high feedstock (edible/vegetable oils) costs which make it unfeasible to produce biodiesel. Biodiesel will be feasible if CPO price falls below RM1,600 per tonne and crude oil stays at US$60 per barrel,” he said.

Over the longer term, the analyst suspects that second generation biofuel, which will be more efficient to produce and uses non-food feedstock such as waste and wood chips, will reduce the world’s reliance on rapeseed, soybean and CPO.

“This means that over time, the link between edible oil and crude oil will diminish,” he opined.

On the relationship between CPO price and soyoil price, the MIDF analyst expects both to continue to track each other within a certain price band.

“For the past 10 years, the average discount of CPO price to soyoil price has been about 20% per tonne as the commodities are direct substitutes of each other,” he said.


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