Palm oil resumes rally as Black Sea trade disruption to persist

NEW YORK • Palm oil resumed gains as traders continue to assess the fallout from Russia’s invasion of Ukraine, which is heading toward the two-week mark. 

Flows of commodities are being disrupted with Black Sea ports shut and some shipping routes closed off. 

Ukraine and Russia ship about 80% of the world’s sunflower oil supplies. 

That’s made the global market even tighter and sent prices of palm and soybean oil, the two most used oils, to records. 

Palm oil for May delivery rose as much as 6.2% to RM6,666 a tonne, but remained below an all-time high of RM7,108 reached last week for the rolling, most active contract. 

Prices lost 7.8% last Friday amid concerns about demand destruction. Soybean oil rose as much as 3.8% in Chicago yesterday. 

“There is no sign so far that the war is abating,” said Gnanasekar Thiagarajan, head of trading and hedging strategies at Kaleesuwari Intercontinental. 

“That will result in an edible oil supply crisis at a time when palm oil inventories are already low and demand could rise ahead of the Ramadhan festival.” 

“The market is also getting support from a rally in crude oil prices, which could encourage the use of palm oil to produce biofuels,” Thiagarajan said. 

Petroleum prices surged after the US said it was discussing a ban on Russian crude imports, fanning supply fears in an already jittery market. 

Stockpiles in Malaysia, the second-biggest grower, probably dropped to a 14-month low at the end of February as production slumped for a fourth straight month due to a chronic labour shortage, a Bloomberg survey showed. 

The nation’s crude palm oil output fell 7.8% in February from the previous month, according to the Malaysian Palm Oil Association. Production in Sabah and Sarawak both dropped 17%, while that of Peninsular Malaysia slipped 1.3%.

The bullish trend is set to continue. Prices of edible oils will remain elevated in the coming months and could even rise further as the war in Ukraine restricts global supplies, according to LMC International chairman James Fry. 

“The squeeze in petroleum and the loss in supply of sunflower oil — as well as the lack of any alternative to come and fill the gap right now — just means things are going to be tighter than anyone expected one or two months ago,” Fry said in an interview in Kuala Lumpur. 

While Indonesia, the world’s big- gest palm oil producer and exporter, will push ahead with its ambitious biodiesel program even as prices of the tropical oil have soared, which could increase the costs of producing biofuel. 

The B30 programme, which stipulates that fossil fuels must be blended with 30% palm oil, is still running as planned, said Dadan Kusdiana, DG of New and Renewable Energy at the Ministry of Energy and Mineral Resources. 

The mandate is aimed at soaking up bulging supplies in the top grower. But palm’s premium over gasoil has ballooned to record levels, most recently driven by Russia’s invasion of Ukraine that has further tightened global cooking oil supplies. This presents a challenge to the funding of B30 incentives. 

“Currently, we haven’t discussed or evaluated the B30 programme and it is still running as planned,” Kusdiana said. The government is monitoring crude palm oil and petroleum prices closely and will prepare options to anticipate any development, he said, without elaborating on those plans. 

Indonesia’s efforts to increase the palm content in biodiesel to 40% by 2021 were put on hold due to cheaper fuel costs and record high palm prices. Raising the blending rate would require the government to provide a larger incentive through the money it collects from palm oil export levies. 

Road tests for vehicles powered by 40% palm-biodiesel may be delayed until April, Kusdiana said, adding that the discussions on B40 are ongoing. 

“Biodiesel plays a big part in reducing carbon emissions,” he said. –BLOOMBERG