The Australia Burea of Meterological (ABM) has raised the probability of an El Nino occurring in 2015 to 70% from 50%, highlighting that ocean temperatures in the tropical Pacific continue to be warmer than average, while trade winds remain weaker than normal.
All climate models monitored by the ABM indicate that El Niño thresholds will be reached or exceeded by Jun. However, the accuracy of the model made during the El Niño–Southern Oscillation (ENSO) transition period (ie. Feb to May) is lower than for forecasts made at other times of the year.
The return of the weather phenomenon could bring below-average rainfall to this region, impacting yield but offset by higher CPO price.
Maybank-KE highlights that the timing of this weather alert is almost identical to 2014’s episode, which eventually disappointed the market as the El Niño threat faded in 2H15. Still, the house believes that this year could be different and is worthwhile to closely monitor the situation.
A clearer picture could shape up closer to Jun 2015. While the palm oil sector in general lacks short term re-rating catalyst, the advent of this El Niño may quickly change the sentiment.
For now, Maybank-KE has a Neutral call on the sector, with top picks being First Resources (TP $2.32), Wilmar (TP $4.04) and Bumitama Agri ($1.30).