Palm Oil Internet Seminar

Crude Oil, Crude Palm Oil (CPO) and Covid-19
By: Dr. James Fry

Dr Fry, LMC's Chairman, was educated at Oxford University, where he obtained an MA in Mathematics and a Doctorate in Economics. After teaching Economics at Magdalen College, Oxford University, in 1980 Dr Fry jointly founded LMC International, and is the company's Chairman. He continues to devote almost all his time to the company's research and consultancy activity and he is in overall charge of its work in commodity-based sectors. LMC's headquarters are in Oxford, UK with offices in New York, Kuala Lumpur, Detroit, Shanghai, Bangkok and Frankfurt, with a partner office in São Paulo, Brazil
The presentation will review how the big issues and question marks today, notably the impact of not only COVID-19, but also the battle between the Saudis and Russians to increase their share of the world petroleum market, have fed through to the palm oil market.

The paper will examine how well the price band has performed under these two pressures. It will also contrast the loss of palm oil output as a result of COVID-19 with the loss of demand caused by the pandemic, due to the lockdowns and the longer damage to global economies. This feeds through to palm oil stocks and, via the level of stock to the spread between CPO and crude petroleum prices, which will conclude the presentation.

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Questions & Answers (3) :
K K Goyal
4 years ago
Dear Dr Fry Many thanks for your very nice useful presentation.
Masui Nobuhiko
4 years ago
Dear Dr James Fry Very thanks for your presentation. I was very disappointed at the cancellation of POC 2020 and missing your annual presentation there, I felt easier to listen to your forecasting. We have mainly consumed Lauric, PKO, could you let us know its premium on Brent Oil in 2020/2021 as it done for CPO ? Looking forward to hearing from your answer (as just in the time to study our own budget - lauric price in 2020/2021) Best regards, Masui Nobuhiko, Kao Corporation (Tokyo Japan) Procurement, Opretaaonal Excellence - Direct Materials, Global
Many thanks for your kind comments. On PKO, its premium in Rotterdam over Brent went close to $600 in the first weeks of this year. In May and June it fell towards $400. Despite some boost to demand from the production of chemicals for sanitisers, the seasonal increase in palm output will lift PKO output and cause PKO stocks to rise over the next six months. This PKO stock increase will pull the PKO premium over Brent down to $250. PKO will remain at a significant discount to CNO but this discount will narrow by $70 as some demand switches from CNO to PKO. ( Posted on behalf of Dr. James Fry)
4 years ago
George Teh
4 years ago
Dear Dr Fry I note your insightful presentation laying out the price trends of crude oil, gasoil, and CPO and correlation thereof. You articulated that CPO often trades at US$100/tonne discount to gasoil. In your slide #5, can you please explain the reasons for trend between 2013 and 2018 thereabout when the relationship was apparently reversed? It would seem that the same reversal was observed since end 2019 is it not? Is this sustainable in your view? In your slide #11, would you care to explain the basis of of imputing a US$100/tonne premium to crude oil in estimating CPO price outlook this year. Thank you. George Teh
The fundamental point about the relationship between CPO and the petroleum complex is that the cash costs of producing palm methyl ester from CPO are in the region of $100; therefore when EU CPO falls $100 below gasoil, palm methyl ester production costs will be similar to the gasoil price in Rotterdam. At that point, while PME and gasoil costs would be similar in Europe, PME would be cheaper than gasoil in SE Asia, since CPO in SE Asia is cheaper than in Europe (the difference being the sum of freight to Rotterdam and export taxes). That is what helps to defend the floor to the EU CPO price band, as some unsubsidised demand for biodiesel develops to take advantage of PMEs cheapness against diesel fuel. When stocks of palm oil in Malaysia fall back, the market gets tighter and CPO moves up first to a premium over Brent crude, and then later to a premium over gasoil. The upper limit to the CPO-Brent premium in Europe is just over $400 per tonne. This is the point at which palm biodiesel demand starts to be cut back and users switch to other oils. The CPO-Brent premium touched $400 briefly this year, but has already fallen back to around $300, and as MPOB stocks rise further, to go above 3 million tonnes, the premium will fall again. The low point is seen as being somewhere in the region of a $100 EU premium for CPO over Brent. This will not make unsubsidised biodiesel competitive, but will encourage some switching from other oils towards palm and bring back the B20 mandate in Malaysia, at which point the MPOB stocks will stop rising further. (Posted on behalf of Dr. James Fry)
4 years ago
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