Jan 20 (Reuters) - Malaysian palm oil prices are forecast to rise to 2,700 ringgit ($685.98) a tonne in the next three months due to falling stockpiles and increased demand from Indonesia, leading edible oils analyst James Fry said on Saturday.
Crude palm oil (CPO) prices are also expected to hit $690 a tonne on a free-on-board basis, he told an edible oils conference in Karachi, Pakistan, according to an early copy of his presentation.
Rising stock levels typically weigh on benchmark palm oil prices, which have lost more than 10 percent since November on rising Malaysian stockpiles. Palm oil futures fell 1.3 percent on Friday to close at 2,445 ringgit a tonne.
Inventory levels in Malaysia MYPOMS-TPO, the world’s second biggest palm oil producer after Indonesia, rose to 2.7 million tonnes last month, their highest level in more than two years.
However Fry, who is chairman of the commodities consultancy LMC International, said palm oil stock levels would fall until May before rising rapidly.
“The speed of the rise depends on the willingness of Indonesia’s CPO fund to raise the mandate,” he said, referring to a government agency in charge of collecting palm oil levies to finance biodiesel subsidies in Indonesia.
Indonesia is pushing to increase the usage of biodiesel to cut its oil import bill and curb greenhouse gas emissions. A higher mandate also absorbs more palm oil from the market to make biodiesel, increasing demand and pushing up prices.
Indonesia’s biodiesel mandate currently stands at a minimum 20 percent blend of bio content in diesel fuel, up from 15 percent in 2015.
In the third quarter, crude palm oil prices are expected to fall back to the $630-640 per tonne free-on-board basis range and will decline further in the fourth quarter, said Fry, tracking an expected decline in crude prices following the initial public offering (IPO) of Saudi oil giant Aramco.
Palm oil is impacted by movements in crude oil prices, as the vegetable oil is used as feedstock to make biodiesel as a fuel substitute. When crude prices fall, demand for palm oil, as a fuel substitute, also eases.
Ahead of the planned Aramco IPO, expected in the second quarter, crude prices are expected to remain firm.
“The Saudi government... needs to get the best possible price for Aramco at its IPO this year,” said Fry.
“I expect OPEC cuts to last till Aramco has had its IPO. After that, you can expect output cuts to end, primarily because traditional oil exporters can see the U.S. shale oil industry taking advantage of higher prices to ramp up their output.” ($1 = 3.9360 ringgit) (Reporting by Emily Chow; Editing by Gareth Jones)