KUALA LUMPUR (Aug 21): BMI, a unit of the Fitch Group, has revised its 2024 forecast for Bursa Malaysia-listed third-month crude palm oil (CPO) futures contracts upward to RM3,850 per tonne from RM3,750 per tonne, reflecting a 2.67% increase.

"While this upward revision indicates that our earlier view that prices would ease throughout the second half of 2024 (2H2024) has not occurred to the extent that we expected, we remain below consensus and of the view that prices will face bearish headwinds into 2025, expecting an average price of RM3,700 up to end-2024," it added.

In a note on Tuesday, BMI said that throughout the remainder of 2024 and into 2025, it expects that ample supplies, competition from alternative edible oils, and unsure import demand will weigh on the palm oil market.

"... the expected onset of a La Niña event in 4Q2024 and the coming into force of the EU Deforestation Regulation at the start of 2025 could further compound pressures.

"In the near term, increased tension in the Middle East, which could see fuel prices and biofuel feedstock demand increase, represents the principal upside risk to our outlook," it said.

This adjustment comes despite a slight decline in average prices to RM3,952 per tonne in August 2024 from RM3,973 per tonne in May, according to its note on Wednesday.

Consequently, BMI has also revised its 2025 average price forecast to RM3,650 per tonne from RM3,500 per tonne.

Palm oil prices rose 0.70% year-to-date as of Aug 9, closing at  RM3,747 per tonne, which is 0.64% lower than 12 months earlier.

However, prices saw significant drops of 3.32% on Aug 5 and 2.17% on Aug 6.

Several factors contributed to the market's volatility, including an appreciating Malaysian ringgit, a global market sell-off, and a fall in crude oil prices.

The USD/MYR exchange rate fell to 4.225 on Aug 6 from 4.620 at the end of July.

Global market tumult saw the S&P 500 drop 6.08% between July 31 and Aug 5, negatively affecting ringgit-denominated securities.

The palm oil market has since stabilised, reducing accumulated losses to 4.12% by Aug 11.

Despite this, BMI believes market sentiment remains fragile. The Malaysian ringgit is expected to appreciate further, weighing on ringgit-denominated palm oil futures.

Additionally, the oil and gas team sees downside risks to Brent crude, predicting it may average below US$85 (RM370.97) per barrel in 2024.

Soybean market conditions also pose significant headwinds.

CBOT second-month soybean futures hit their lowest level since August 2020, closing at 947 US cents per bushel on Aug 13.

Soy oil prices fell to 40.29 US cents per lb, their lowest since December 2020. Ample global supplies and increased competition from South America have weakened sentiment.

The USDA’s August WASDE report showed an upward revision in the US soybean crop forecast, further pressuring prices. Chinese soybean imports were down to 48.5 million tonnes by June 2024, compared to 52.6 million in the same period in 2023. Meanwhile, Brazilian exports to China increased by 9.68%, intensifying competition for US exporters.

In terms of upside risks, BMI notes a drawdown in Malaysian palm oil inventories in July and potential lagged impacts of the 2023-2024 El Niño event on Indonesian production.

Malaysian Palm Oil Board data showed stocks fell to 1.73 million tonnes in July from 1.83 million tonnes in June, despite high CPO production and robust exports.

Indonesia's production also declined to 22.1 million tonnes in January-May 2024 from 22.9 million tonnes in the same period in 2023.

Wilmar International reported a 7.07% decline in average yields for oil palm fresh fruit bunches due to El Niño effects.

BMI forecasts a narrower global palm oil surplus in 2024/25 at 1.3 million tonnes, down from 1.9 million tonnes in 2023/24.

However, BMI expects the average palm oil price to be lower in 2025, citing demand-side headwinds and a high base from the 2022 price surge.

The EU Deforestation Regulation could reduce EU import demand, while continued soybean market weakness might increase China’s domestic soy oil use, affecting palm oil demand.

Additionally, a La Niña event forecast for 4Q2024 could support oil palm yields, though a severe event might lead to below-expectation production.

Environmental and production risks also loom, with potential impacts from sustainability policies and weather conditions in Southeast Asia.