This article first appeared in The Edge Financial Daily, on October 8, 2015.

KUALA LUMPUR: Crude palm oil (CPO) price is expected to have limited upside after rising as much as 33% to RM2,395 per tonne on on Sept 29, from a six-year low of RM1,800 per tonne on Aug 26 this year, agriculture and macro economist Abah Ofon opined.

In an interview with The Edge Financial Daily, the former director of agricultural commodities at Standard Chartered Bank (Singapore) Ltd said this is because CPO supply remains abundant at this juncture. It is demand for edible oil that worries him.

“In terms of output, I still think the market is well-supplied, I do not have concerns about production at this stage. One of the biggest drivers now is El Nino. We need to see how intense El Nino could potentially be, and what India would do, in terms of import,” the founder and chief strategist of 3XG Consulting United Kingdom, said. “I think perhaps El Nino is affecting demand in India more than it is affecting supply in Southeast Asia,” Ofon inferred.

India is the world’s largest importer of palm oil, and Reuters reported that the volume is expected to increase further to a record high of 9.6 million tonnes by November due to a back-to-back drought season suffered by the country.

Other than the climate factor, Ofon also said the global economy and energy prices are the part of the key indicator for CPO price movement. “Over the last couple of years, Indonesia has been increasing the production (of CPO) dramatically. So at this stage I am not overly concerned about supply, I am only worried about demand, as I feel that the backdrop of demand is a little bit soft, just because the global growth is soft, and energy prices are weak,” he said. 

On Tuesday, the International Monetary Fund (IMF) revised its global economic growth forecast for 2015 further downward to 3.1%, from its July projection of 3.3%.

“The IMF has cut global growth rate, coupled with the (US) interest rate uncertainties, these are going to dampen demand in China and the US, so global growth is the key indicator,” Ofon said. 

“Energy prices as well ...  we need to see an improvement in oil prices. I do not think that only supply concerns will drive prices, it has to be a combination of stronger global growth and consumption,” Ofon said.

The plunge in crude oil prices since mid-2014 lowered demand for biofuel and biodiesel, which are derived from CPO.

Ofon’s view differed from industry analyst James Fry, who forecast CPO prices to rise further to US$600 (RM2,512) by the end of the first quarter of 2016, even without El Nino.

The benchmark December CPO contract closed at RM2,318 yesterday, down RM54 or 2.28% from the day before.

Moreover, Ofon said the recent surge in CPO prices might undermine demand, as buyers may shift to other alternatives like soybean. 

“However, we need to look at the fundamental of the soybean market, as soybean is normally the leader, as opposed to a follower in edible oil market. That is what we have seen in the past, when soybean prices rise, CPO prices rise. When CPO prices rise independently, I do not know by how much it is going to push soybean prices,” he explained.

Soybean futures traded lower since July this year when it was trading at US$10.28 per bushel, declining 13.13% to US$8.93 per bushel on Tuesday.

Prices of soybean oil have also declined 17.53% to 28.74 US cents per pound on Tuesday, from 34.85 US cents per pound on June 5.