The palm complex continues to defy predictions and languish at prices well below the forecast despite bullish predictions at a palm oil price outlook conference in Malaysia last month.

Actually, price correction started soon after the conference ended. Over the last two weeks, the market has seen 8 per cent decline in crude palm oil prices, closing at 2160 Malaysia ringgit (MYR) a tonne last week. Forward prices – for May and June – are not markedly different. At $612/t, the cash market price for olein and crude palm oil is the same with little variation for forward months.

From the beginning of the year, it has been clear that market fundamentals are not in favour of firmer prices, nor are non-fundamental drivers including currency, geopolitics, monetary policy and weather. The dollar has had a dramatic run in recent months gaining strength and capping the upside for commodities in general.

The precipitous slide in crude oil prices over the last six months shows no sign of reversing anytime soon. This has considerably weakened demand from biodiesel side. Discretionary blending has all but disappeared.

On the other hand, demand growth potential for palm oil is decidedly weak given the mixed picture of the world economy. China’s imports are slowing only to be partially neutralised by larger Indian imports. Huge inventories of palm oil and soft oil at the origins and at the destinations (China, India, in the main) continue to pressure the market down.

An interesting feature of the price outlook by one of the analysts was “incremental demand and supply”. This concept has only a limited role in interpreting market conditions, and could often be misleading for forecasting prices. For instance, if incremental demand was higher than incremental supply, there would normally be a rise in price and result in demand rationing through price action.

What happens in a year when incremental supply exceeds incremental demand? Prices will soften – other conditions remaining the same. But what happens to the excess supply? It would inevitably be carried forward to the following year, augmenting the supply for that subsequent year. So, incremental demand-supply has to be employed dynamically and the opening and closing stocks cannot be ignored when undertaking a fundamental analysis. No wonder, analysts tend to go wrong often.

With peak production season for palm oil round the corner, soyabean supply pressure from South America mounting and prospects for a bumper soybean crop in the US Midwest once again, the world is unlikely to face any shortage of vegetable oil. The spread between gas oil and palm oil as well as the spread between palm oil and soft oils is unfavourable for palm oil.

In the event, barring unforeseen circumstances, crude palm oil should be trading in a narrow range of 2,100-2,200 MYR a ton in the next three months.

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