It said on July 29 the wet weather in Sabah early this year plus dry weather two years ago have negatively affected production, but the impact was diminishing and was expected to result in a later peak production in 2009.

Rainfall in Peninsular Malaysia, although below last year's level, might not negatively impact on production as the dry period did not persist.

"This, plus an earlier recovery in Indonesia's production, suggest that there is ample supply of palm oil going forward and that palm oil prices will inevitably fall below RM2,000 per tonne on sustained basis once it becomes clear that the El Nino impact on production is negligible. Maintain Underweight," it said.

OSK Research said plantation stocks have moved higher since its Underweight call in mid-May. This was despite palm oil prices having fallen sharply since, leading it to believe that the high cash levels held by portfolios was being put to use.

"While this may continue to hold up plantation stocks, its divergence from sector fundamentals is growing by the day,
especially if palm oil price sustains its downtrend," it added.

Another development which would affect the plantations sector was that the El Nino threat was not serious yet.

"While the meteorological authorities continue to warn of developing El Nino conditions, we still do not see hard evidence indicating that this round of El Nino would be severe enough to be a threat to palm oil production," it said.

OSK Research believed that had it not been for concerns over El Nino, palm oil prices should have fallen much further from current levels.

"We maintain that the weather factor is the last bullish argument for palm oil. Once the threat of El Nino diminishes, a collapse in palm oil price cannot be ruled out," it said.

Malaysia's palm oil export for the first 25 days of July came in at 1.085 million tonnes, up by 10.3% over the same period a month ago, which is within the past 10 years' range of between minus 3% and plus 16%.

While there could be a seasonal rise in exports, particularly due to stocking up for the Ramadhan month and Chinese summer demand, there is sufficient buffer due to the strong pick-up in Indonesia's production.

The Indonesian Palm Oil Producers Association said that the country's palm oil export for June plunged 25% m-o-m to 1.18 million tonnes. As the export decline coincided with a seasonal rise in production, this suggests that Indonesia's inventory could be rapidly building up. Even if its June production remained flat month-on-month inventory would still have swelled by a massive 390,000 tonnes," it said.