Palm Oil Falls as Crude Drop Erodes Prospect for Biofuel Demand

By Jae Hur

Aug. 25 (Bloomberg) -- Palm oil futures in Malaysia, the global benchmark, declined for the first day in four after crude oil slumped last week, reducing prospects for biofuel demand made from the commodity and rival soybean oil.

Crude oil lost 5.4 percent on Aug. 22, the most since Dec. 7, 2004. Palm oil and soybean oil, used mainly in cooking, often follow crude oil prices as they can be used as alternative fuels. Soybean oil fell 2.5 percent on Aug. 22 in Chicago, the biggest drop in a week.

``Crude's down by $6 a barrel,'' Ben Santoso, a plantation analyst at DBSVickers Securities (Singapore). The decline in palm oil was expected and ``sentiment was too overwhelming'', he said.

Palm oil for November delivery fell as much as 105 ringgit, or 3.9 percent, to 2,610 ringgit ($774) a metric ton and traded at 2,628 ringgit as of 12:30 p.m. in Kuala Lumpur. Prices gained 10.7 percent last week, after dipping to a 15-month low.

The price may find a floor of 2,200 ringgit in the next few weeks as a 41 percent plunge from a record 4,486 ringgit on March 4 fuels demand, Dorab Mistry, director at Godrej International Ltd., one of India's biggest buyer of the commodity, said at a conference in Kuala Lumpur today.

Mistry, who has traded vegetable oils since 1976, said he abandoned his forecast for palm oil reaching 4,500 ringgit by February next year as it was ``over-optimistic.''

Malaysia's palm oil exports rose 0.8 percent in the first 25 days of August, compared with the same period the previous month, according to independent surveyor Intertek.

Malaysian Exports

A total of 1.14 million tons of palm oil were tracked from Aug. 1 to Aug. 25, Intertek said in a report today. Malaysia exported 1.13 million tons in the same period in July, the surveyor said.

According to forecast for November and December, there should be some drop in palm oil production, Santoso said.

``The stocks to usage ratio for palm oil should come down to the same level of December 2007,'' he said. ``That should be supportive to the price by then.''

Oil for October delivery declined as much as 0.5 percent to $114.03 a barrel before trading at $114.55 at 1:23 p.m. Singapore time.

To contact the reporter on this story: Jae Hur in Singapore at jhur1@bloomberg.net