Factors driving today’s oils markets Presentation to Globoil 2019, by James Fry, Chairman LMC International, Oxford, UK

Outline of my presentation today My main aim today is to explain current market drivers, rather than focus on price forecasts. So I will end your suspense and present my forecasts right now. First I list the key assumptions in the background. They are: Brent June futures today are $58/bbl. I use that price in my forecasts. MPOB stocks will peak in Nov-Dec, limiting the CPO premium over Brent until then, before the stocks fall back and the premium rises. World soy oil output will grow only slowly in 2019-2020, with China’s output down in step with its crushing for meal. Rapeseed oil supply is falling, leaving sun oil as the oil with the fastest growth in output. The price forecasts may be summarised as follows: EU sun oil will trade $150-$200 over CPO; EU soy oil $200-$250 over CPO; and rapeseed oil $350-$400 over CPO in the period until June. CPO prices will not move much until Q1, but will then react to (a) the impact of 2 years of big cuts in fertiliser use, (b) recent droughts, (c) minimal growth in Indonesian output in 2019 after falls in Q1-Q3, and (d) the boost to SE Asian biodiesel mandates. This will cause stocks to fall and lift EU CPO during Q2 $75 above today to $620 (FOB $570).

Vegetable oil price movements

This illustrates the EU oils price band since 2013 You see that on several occasions EU CPO prices fell to parity with Brent crude oil. When this occurs, CPO prices in S.E. Asia are below Brent crude because their CPO producers must pay freight costs and export taxes to deliver their palm oil to the EU market. Their CPO is then a very competitive fuel. EU vegetable and mineral oil prices is where CPO = Brent prices

This is the daily EU CPO-Brent premium for the past 2 years CPO in Indonesia was often much cheaper than crude oil. No subsidy was needed to export biodiesel at a discount to diesel. Why did the discount soar in October? Because PME producers daren’t export their surplus due to the large penalties imposed that month on any failure to meet the B20 mandate. Daily CPO premium in the past two years in Rotterdam and inside Indonesia

Reason why petroleum sets the floor to EU CPO prices Indonesian biodiesel exports react quickly to the POGO, the palm oil-gasoil spread, since Indonesian biodiesel competes with Singapore gasoil as a fuel. A large local CPO discount on Singapore gasoil helps to stimulate demand for CPO as a free market fuel, reducing CPO stocks and lifting CPO prices. Moving average of biodiesel exports vs. the local CPO premium over gasoil

Stocks still largely determine the CPO premium over Brent This plots the EU CPO premium over crude oil (the CPO price minus the Brent price) in $/tonne against Malaysian palm oil stocks. Higher stocks imply a lower premium; and lower stocks a higher premium. The CPO supply-demand balance (via stocks) sets the premium over Brent, not the actual CPO price. Monthly EU CPO premium over Brent vs. MPOB palm oil stocks

Palm oil has becoming more competitive vs. other oils The premium of other oils over CPO has been high recently. This reflects a balance between (1) large CPO stocks, (2) low Chinese soy oil output, and (3) a poor rapeseed crop . With the sunflower harvest arriving, sun oil will again be the cheapest soft oil; but CPO acts as the floor to the prices of other oils. Daily EU premium for the three leading soft oils over CPO since 2017

Recent trends in palm oil output

Indonesian and Malaysian cycles are the reverse of each other Please note that the sharp slowdown in publicly quoted companies’ plantings in Indonesia has meant that their CPO production growth has been lagging behind that for the country as a whole. Year-on-year growth in Malaysia and Indonesia, singling out public companies

The impact of India’s olein import tariffs

A digression on the refined shares of SE Asian palm oil exports In their overall palm oil exports, there is surprisingly little indication of a significant shift as a result of India’s decision to give Malaysia a 5% import tariff preference on Indian RBD imports this year. The refined share of Indonesian exports actually rose faster than Malaysia’s in the early months of 2019. Moving averages of the refined shares in total palm oil exports in these countries

Biodiesel demand plays a crucial role

Biodiesel demand outlook in Malaysia and Indonesia Total Malaysian biodiesel production will be 1.3 million tonnes this year. It now has a B10 mandate for cars and this will be extended to heavy vehicles in 2020, taking total output above 1.6 million tonnes. Indonesian biodiesel production will reach 7 million tonnes this year. Next year the government will implement a B30 mandate, lifting its total biodiesel output above 8 million tonnes, though exports will now be limited by EU anti-dumping duties, allowing Malaysian exports to help to meet the shortfall. Malaysian biodiesel demand to 2020, ‘000 tonnes Indonesian biodiesel demand to 2020, million tonnes

Crude oil, the key factor behind CPO prices

North America, led by the US, now leads oil output growth Since 2008, OPEC crude oil output has actually fallen, and the US, with some help from its neighbour Canada, has been the leader in world production growth in petroleum plus other liquid fuels (which include condensate from natural gas and biofuels, but not LNG). Total growth in petroleum & liquids output in the US, Canada and OPEC since 2008

One sector, tiny just 10 years ago, drives the crude market In 2011, US shale oil output was 2 million barrels/day. Now it is near 9 million barrels/day, after average annual growth of 0.8 million barrels/day, despite WTI (US crude) prices halving over this period. As a result, OPEC and Russia have more or less lost control of the petroleum market. The US output of shale oil vs. the WTI crude petroleum price

Tracking the monthly growth in US shale oil production Individual shale oil wells have a short productive life. Monthly growth in their total output reacts quickly to changes in WTI prices. We can see that at $70 WTI, shale oil can supply all the growth in world oil demand of 125,000 bbl/month. At $55, it supplies 60,000 bbl/month, half the growth. Growth in monthly U.S. output of shale oil vs. the WTI price

Conclusions from my presentation You should divide your analysis of vegetable oil prices into two parts. First, you must try to understand what drives world crude oil prices, and I have just described the crucial role played by US shale oil producers. Then you must analyse the behaviour of the premium of the individual vegetable oils, of which palm is the most important, over crude oil prices. For palm oil, shifts in monthly MPOB stock totals are the main indicator of the direction of change in the CPO premium over crude oil. For the other vegetable oils, you need to investigate the supply-demand factors that determine their spreads over the CPO price. Looking ahead, palm oil stocks will follow their usual seasonal pattern and rise till November, which will limit the CPO premium over crude oil. After that, palm oil output will be weak, not only because of its normal monthly pattern, but also because of the cumulative impact of cutbacks in fertiliser use in the past two years and of recent droughts on yields. This slowdown of palm oil output will coincide with further growth in biodiesel output in S.E. Asia, forcing down palm oil stocks and raising the EU CPO spread over Brent from $80/tonne today to $190 by Q2 2020.