ABSTRACT:
The article highlights the movement of crude palm oil (CPO) price in the world market and seeks to find various significant factors affecting it. Focus is given to Brent crude oil (BCO) price and the impact of BCO’s prolonged low price on CPO price movement. Both prices of CPO and BCO have moved in tandem ever since the introduction of palm-based biodiesel and the implementation of the Envo Diesel programme in March 2006, indicating that BCO affects the development of CPO price. In addition, due to the complexity of the oils and fats sector, CPO price is also found to be affected by other time-varying factors, such as soyabean oil (SBO) prices, palm oil (PO) supply and exports. SBO is a strong competitor of CPO due to the substitutability factor and competes for the same markets of the global edible oils sector. Meanwhile, from the supply perspective, any increase in PO supply can cause its price to be bearish in the market. In addition, any decline in PO exports to major importing countries, especially India, China and European Union (EU), can also depress CPO price. The results of the bound test for the CPO price model indicate the existence of a long-run relationship between CPO price and SBO price, BCO price, CPO production and PO export. At the same time, the short-run analysis found that BCO and SBO prices have a positive relationship with CPO price. The results indicate that in the short-run, CPO price will increase when BCO and SBO prices increase. BCO price is able to have a high impact on CPO price, especially during the high BCO price regime. However, when BCO price declines and remains stable below USD 50/barrel, its impact on CPO price movement becomes weak. As a result, the impact of prolonged low BCO prices on CPO price movement will only be marginal; thus, CPO price can still be bullish in the market place if SBO price increased, if PO supply availability declines and export increases in the market place.
Keywords: crude palm oil, Brent crude oil, biodiesel, time-varying factors, bound test and supply availability
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