KUALA LUMPUR: OCBC Bank economist Howie Lee is bullish on world pricing on petroleum and palm oil, as supply is slowing while demand for the commodities remain firm.
In his notes to investors today, Lee said this includes the inability of shale oil output to replace Organization of the Petroleum Exporting Countries' (OPEC) curbs in the short-run.
He said early this month, OPEC members agree to keep output at current restricted quotas, as the oil bloc seeks to balance a volatile macroeconomic environment that has dampened global energy consumption.
The combined oil production from the big three – OPEC, Russia and the US – is likely to finish 2019 with a production of at 51.77 million barrels per day by our estimates, 7 per cent lesser than 2018.
Lee estimated the loss of four million barrels per day in production will weigh on the market and likely offset the pessimism surrounding energy consumption, keeping prices supported.
Iran’s relation with the US and its allies remain the biggest source of upside risks to oil prices at present.
Iran has allegedly sabotaged international oil tankers along the Persian Gulf, while the US almost carried out an air strike against Iran after the latter downed its military drone.
An Iranian oil tanker was also seized by the UK Royal Marines, to which Iran has vowed retaliatory actions. Armed conflict on Iranian shores is likely to send supply shockwaves in the Middle East and could result in world oil prices escalating quickly.
Palm oil prices have been on a downtrend from an average of RM2,200 per tonne at the beginning of the year. For the past six weeks, palm oil has been trading below RM2,000 per tonne.
Lee, when commenting on palm oil pricing highlighted production and inventory levels are beginning to look tight and that may precipitate an uptick in prices, if these trends continue.
He highlighted El Nino appears to have finally taken its toll on Malaysian fresh fruit bunch yields, having stayed at 1.54 tonnes/ha since March and not displaying its seasonal uptick.
Malaysia's palm oil inventories have now sunk to 2.45 million tonnes in May 2019 from the record high of 3.22 million tonnes in December 2018.
Stabilisation in soyoil and diesel prices, Lee said, will likely provide the base for palm oil prices to rebound off its lows.