Palm Oil’s Rally to 11-Week High Stalls as Gains Seen Overdone

Nov. 17 (Bloomberg) -- Palm oil fell as some investors judged the rally to an 11-week high, spurred by advances in soybeans, was excessive.

“There’s a lot of bullishness priced in for both oils,” said Scott Briggs, the agricultural commodities strategist at Australia and New Zealand Banking Group Ltd. in Melbourne, by telephone. “It’s potentially overdone.”

February-delivery palm oil climbed as much as 1.5 percent to 2,370 ringgit ($705) a metric ton, the highest level for the most-active contract since Aug. 28. It lost 0.2 percent to 2,331 ringgit at 5:20 p.m. on the Malaysia Derivatives Exchange.

The tropical commodity could trade between 2,100 and 2,200 ringgit in the next four to six weeks as “there’s potential for a pullback and that’s a realistic trading range,” Briggs said.

JPMorgan Chase & Co. said in a report that dry weather in Southeast Asia may curb production in the first half, which may help palm oil. Palm oil output is typically lower in the first half than in the second.

Soybean oil for January delivery surged 2.9 percent to 40.18 cents a pound yesterday in Chicago, posting the highest close since June 4. That left soybean oil $195.14 a ton more expensive compared with palm oil, the widest premium since Oct. 21, according to Bloomberg calculations.

“There’s some value in the palm oil-bean oil spread” currently, Tobin Gorey, a commodity analyst at J.P. Morgan Securities Ltd. in London, said. The “deep discount for palm” reflects tightening supplies of soybean oil and more palm oil, and “those drivers will shortly go into reverse,” he said.

Seasonally, palm oil production has peaked while soybean oil supplies are just coming onto the market, and these factors will reduce soybean oil’s premium, Gorey added.

Premium Narrows

Soybean oil dropped for the first time in five days, easing 0.6 percent to 40 cents a pound at 4:01 p.m., after advancing 6 percent in the previous four days. The premium narrowed to $182.75 after palm oil’s gain today.

Malaysia, the second largest producer of palm oil, reported record output of 1.99 million tons in October, lifting reserves to 1.97 million tons, a 10-month high, the country’s palm oil board said Nov. 10.

Drier weather in Southeast Asia because of El Nino may “crimp” production of palm oil in the first half and lower yields in the second half, potentially narrowing the tropical oil’s discount to soybean oil, the JPMorgan report said.

“Global vegetable oil inventory levels are, if not tight, then lean,” Gorey said. “It would not take big problems with oilseed crops to see inventory levels drop to tight levels.”

In China, the largest consumer of edible oils, May-delivery palm oil on the Dalian Commodity Exchange rose as much as 1.5 percent to 6,452 yuan ($945) a ton, and ended 0.5 percent higher at 6,392 yuan for the highest close since Aug. 28.