Palm Oil Falls as Crude Drop Erodes Prospect for Biofuel Demand

By Jae Hur and Yoga Rusmana

Sept. 5 (Bloomberg) -- Palm oil futures in Malaysia declined for a third time in four days after crude oil dropped to a five- month low, reducing demand prospects for biofuel made from the commodity and rival soybean oil.

Crude oil fell more than 6 percent this week in New York as the euro dropped to an 11-month low against the dollar amid signs that Europe's economy is slowing. Palm and soybean oils, used in food, often follow crude as they can be used as alternative fuels. Soybean oil touched a five-month low today.

``It's reaction to the other vegetable oil after oil dropped, denting the viability of biofuels,'' Ong Chee Ting, an analyst at Aseambankers Malaysia Bhd., said in Kuala Lumpur.

Palm oil for November delivery fell as much as 3.6 percent to 2,419 ringgit ($700) a metric ton on the Malaysia Derivatives Exchange and was at 2,465 ringgit at 12:30 p.m. break. The price is down 45 percent from the March record of 4,486 ringgit.

Soybean oil for December delivery in Chicago dropped as much as 2.1 percent to 49.20 cents a pound, the lowest since April 1, and traded at 49.85 cents as of 12:41 p.m. Singapore time.

The Malaysian exchange started today trading of U.S. dollar- denominated palm oil futures contracts, with 5 contracts each for November and December deliveries. The November contract traded at $696.50 a ton and the December was at $699 by the midday break.

``Malaysia is trying to replace Rotterdam as benchmark for a dollar contract, but it's still hard to see how this will work,'' Hariyanto Wijaya, a plantation analyst at Trimegah Securities in Jakarta, said.

Crude oil for October delivery fell 1.3 percent, to settle at $107.89 a barrel in New York, its lowest close since April 4. It traded as low as $107.25 before trading at $107.84 a barrel on the New York Mercantile Exchange.

To contact the reporters for this story: Jae Hur in Singapore at jhur1@bloomberg.net; Yoga Rusmana in Jakarta at yrusmana@bloomberg.net