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Danareksa Equity Snapshot - Plantation Sector (NEUTRAL) Will CPO Prices Rally With The Crude Oil
May 14, 2018 17:31


Will CPO PricesRally With The Crude Oil Price?


We believe higher crude oil prices would have a positive impact on palm oil demand, particularly for biofuel, as well as lift prices, as palm oil would become more attractive as a source of energy. We also note that the gasoil premium over palm oil is showing a widening trend. Maintain neutral.


How will rising crude oil prices impact the CPO price? Higher crude oil prices should positively impact palm oil demand and prices as palm oil would become more attractive as a source of energy. In the energy space, palm oil and its rival oils such as soyoil and rapeseed oil compete with crude oil as an alternative source of energy for usage in biofuel. We believe higher oil prices would increase the global demand for palm oil and other rival oils such as soyoil and rapeseed oil to be used as feedstock for biofuel, hence providing a positive catalyst for CPO and its rival oil prices.


On a separate note, we think higher crude oil prices should also boost biodiesel demand in Indonesia; however only for the PSO sector and export market at this point. We believe Indonesia biodiesel consumption may still be limited by the overhang in the regulation which seeks to expand the scope to the non-PSO sector. Based on our calculations, we estimate the breakeven Brent crude oil price at USD81/bbl, assuming a CPO price of MYR2,700/ton, 4.20MYR/USD and 13,300IDR/USD.


The gasoil premium over palm oil is widening. A higher gasoil premium over palm oil depicts the increasing attractiveness of palm oil over gasoil as a source of energy. We also observe that the spread between gasoil and palm oil is currently showing a premium of USD76/ton (vs. the 10-year average discount of USD41/ton). Nevertheless, both gasoil and palm oil prices only have a moderate correlation of +0.32.


Crude oil prices on the rise. The Brent crude oil price has trended upward and risen 175% to its current level of USD77/bbl since bottoming in FY16. This mainly reflects the rising geopolitical tensions in the Middle East and the potential plans of the US to reintroduce sanctions on Iran, thereby potentially limiting Iran’s crude oil exports, combined with efforts led by OPEC countries to prop up oil prices.


Maintain neutral. We maintain our neutral call on the plantation sector for now with LSIP as our top pick. We believe higher global palm oil demand for biofuel, stimulated by the uptrend in crude oil prices, may spur a CPO price rally in the future. However, we believe this angle has not received much attention yet as the market has been focused on future palm oil prices based on the expectation of higher supplies and the outlook of rival oils.


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