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The World Economy, Petroleum and

the Prices of CPO and PKO in 2015

Presentation to IPOC November 2014

by James Fry,
LMC International, Oxford,
The emergence of the oil price band
Plotting EU prices of the main oils reveals that
Brent crude oil (in $/tonne) remains the floor to a
price band that has been solid ever since 2007.
NW Europe prices, US$ per tonne







Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Brent Crude Palm Oil Soy Oil Rapeseed Oil
This shows EU spreads vs. Brent. For a third time
in three years, the floor for CPO (at zero premium)
was tested and the premium quickly rebounded.
EU premium over Brent crude, US$/tonne








Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Palm oil Soy oil Soy oil average Palm oil average
CPO spreads over Brent move in the opposite
direction to MPOB stocks. The rising premium
is already anticipating the fall in stocks in Q1.
600 2,750
EU premium over Brent, $/tonne

500 2,500

400 2,250

MPOB Stocks, '000 tonnes

300 2,000

200 1,750

100 1,500

0 1,250

-100 1,000
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Premium Average premium Stocks
How does the price floor hold firm in
the face of the pressure of stocks?
Daily EU and local Indonesian CPO spreads vs.
Brent give the answer. Freight and export taxes
made local CPO cheap as a fuel, but not today.
Gap between curves = Freight to EU plus CPO export tax
Premium over Brent, US$ per tonne








Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14
CIF Rotterdam Indonesian CPO
Freight costs and export taxes have
defended the floor to the EU price band
• We use EU prices to plot the price band but, in practice, the
CPO price floor is defended in S.E. Asia. The shipping
costs from S.E. Asia mean that, when EU CPO prices are
equal to Brent crude prices, then FOB S.E. Asian CPO
prices are at a discount (the cost of freight) to Brent.
• Until last month, export taxes made CPO even more price
competitive as a fuel inside Malaysia and Indonesia.
• At the low point (4th Oct) in 2012, Indonesian CPO was
$233 (equivalent to $32/bbl.) below Brent; at the low point
in 2013 (6th Sept), its discount was $149 ($20/bbl.); this
year the low point (on 29th Aug) was $177 ($24/bbl.).
• Today’s zero export tax has lifted Indonesian CPO to its
highest premium vs. Brent since 2012, but can this last?
Now PKO has its own price band
The PKO premium over Brent can be seen to
move in the opposite direction to Malaysian
PKO stocks, in a very similar pattern to CPO.
550 1,500

EU PKO premium over Brent US$ per

PKO + oil in PK stocks, '000 tonnes

500 1,200

450 900

400 600

350 300

300 0

250 -300
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Stocks EU PKO premium over Brent
We now consider supply vs. demand.
Is oils output lagging behind demand?
The daily EU spreads for soy, rapeseed and sun
oils over Brent seem to be pulling CPO higher.


Premium over Brent, US$ per tonne





Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14
Soy oil Palm oil Rapeseed oil Sun oil
If the prices of leading oils are moving far
above Brent, are supplies getting tight?
• You may wonder whether supplies of oils have become
so tight that their prices, including that of CPO, have had
to ration the demand for oils by making free market
biodiesel too expensive to compete with diesel.
• We can see proof of this loss of competitiveness in the
sharp fall in unsubsidised biodiesel sales.
• In fact, 2014/15 will see record soy and palm crops and
rapeseed and sunflower output close to last year’s all-
time peak. We know that good demand for meal for feed
means that crushing of beans will produce more soy oil.
• Adding together the output of the six main vegetable oils
this crop year, there will be an increase of nearly 3.5%
in their overall production tonnages worldwide.
What drives demand growth?
If you contrast world oils demand growth with the
premium of Indonesian CPO over Brent, you see
price competitiveness as a fuel is a key influence.
30 8%
Indonesian CPO premium on Brent, $/tonne

% Growth in world demand for main oils

0 7%

-30 6%

-60 5%

-90 4%

-120 3%
2011/12 2012/13 2013/14 2014/15
Local CPO - Brent Demand growth
Price competitiveness of oils as fuel is now
a crucial influence on world demand growth
• We have seen that there is now clearly a price band that
emerged as a result of the increased importance of price-
sensitive demand from biofuels. This helps to absorb
surplus supplies when output starts to outstrip demand.
• Indonesia plays a key role in balancing the market. Export
taxes made Indonesian CPO a very competitive fuel when
high stocks put downward pressure on CPO prices.
• Today there is no export tax and CPO prices are too high
to promote price-sensitive fuel demand. Don’t forget that
Pertamina mandates will not be filled if CPO is too costly.
• This feedback from CPO’s premium over Brent to demand
means that Brent holds the key to CPO’s price range. So,
we really have to understand the crude oil market better.
Petroleum holds the key to prices, so we
must analyse it carefully: Demand first
In the US, shale gas undercuts crude oil/ Mtoe
(metric ton oil equivalent) considerably, and so
oil is steadily losing markets to natural gas.








1986 1990 1994 1998 2002 2006 2010 2014
Oil Gas Coal
The EU has not yet benefited from cheap shale
gas, but there are signs that fracking will come.









1986 1990 1994 1998 2002 2006 2010 2014
Oil Gas Coal
With cheap rival fuels, US and EU crude demand
has fallen as a direct result of high Brent prices.

3% 140
Moving average oil demand growth, %/year

US$/barrel in 2013 purchasing power

2% 120

1% 100

0% 80

-1% 60

-2% 40

-3% 20

-4% 0
1984 1988 1992 1996 2000 2004 2008 2012
US EU Real Brent price
Turning to petroleum production
N. American crude output has responded strongly
to high prices, boosted by new shale oil supplies.
12% 120

10% 105
Moving average oil output growth %/year

US$/barrel in 2013 purchasing power

8% 90

6% 75

4% 60

2% 45

0% 30

-2% 15

-4% 0
1984 1988 1992 1996 2000 2004 2008 2012
Canada US Real Brent price
Less well known is news of Brazil’s offshore oil
fields. Output will go from 1.9 to 4.2 mn bbl/day
by 2020 at a reported break-even of only $45/bbl
Petrobras Pre-Sal output million barrels/day









2013 2014 2015 2016 2017 2018 2019 2020
What about oil production costs?
Reported costs of lifting oil and gas follow crude
prices. (Note: companies may only exploit high
cost deposits at times when prices are high.)

16 120
Real US$ per barrel of oil equivalent

14 105

12 90

Crude oil, US$ per barrel

10 75

8 60

6 45

4 30

2 15

0 0
1981 1985 1989 1993 1997 2001 2005 2009 2013
US Foreign Brent Crude
We have computed production costs/barrel oil
equivalent (including natural gas) for four oil and
gas majors. Costs lie in a $10-$14/bbl range.

Production costs, US$/bbl oil equiv.




2006 2007 2008 2009 2010 2011 2012 2013
BP Shell Chevron ExxonMobil
Even if we make the pessimistic assumption
that all costs/bbl are loaded onto the oil, typical
costs of these majors were only $20-$30/bbl.

Production costs, US$/bbl oil (if gas is free)





2006 2007 2008 2009 2010 2011 2012 2013
BP Chevron ExxonMobil Shell
So, what can we say about prices?
Crude oil price dynamics reveal a classic
commodity cycle driven by investment
• High prices encourage investment, not only in crude oil
wells, but also in the development of cheaper alternatives
like shale gas, which take markets from petroleum.
• The world experienced two decades of low crude oil
prices from the mid 1980s to the mid 2000s, despite Gulf
Wars and a more powerful OPEC than today.
• These low prices were a reaction to the over-capacity
created after the high prices from 1979 to 1985. Prices
did not move above $50 (in today’s values) until 2005.
The subsequent decade of high prices has lifted supplies
while slowing demand. The cycle has now passed its
peak and this is now putting crude prices under pressure.
The CPO and PKO price outlook depends
crucially on what happens to Brent crude
• What high crude oil prices were doing to its supply
growth, while demand was slowing, has been clear for
everyone to see for some years now, especially if you
visited the US and saw the shale boom.
• Because crude prices have taken so long to come off
the peaks, the over-capacity has become substantial.
So I will now present three alternative local S.E. Asian
CPO and PKO price forecasts, corresponding to three
alternative Brent prices in 2015: $80, $70 and $60/bbl.
• At $80, CPO will average $665 (M$2,235); PKO $780
• At $70, CPO will average $595 (M$1,985); PKO $710
• At $60, CPO will average $520 (M$1,740); PKO $635
• Thank You
• Acknowledgements: EIA, IMF, Jacobsen, LMC,
• MPOB, NYSE, Petrobras, USDA, World Bank
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