Malaysian palm oil futures ended higher on Thursday, snapping a three-day losing streak with support from firmer crude oil prices, but investors expect further weakness due to a rising production cycle. Benchmark July crude palm oil on Bursa Malaysia Derivatives Exchange closed 0.5 percent higher at 3,293 Malaysian ringgit ($1,105) a tonne.
Prices had hit a one-week low in the previous session. Trading volumes reached 9,393 lots of 25 tonnes each, compared to 10,969 lots on Wednesday. "Palm oil is mostly following outside markets," said one trader. "You have crude oil trading higher." Palm oil is less likely to be channeled into biofuels because of a lack of government subsidies, but mandates in Brazil and the United States may see more soyoil taken up, which leaves palm oil to lead the food sector.
The most-active January 2012 soyoil on the Dalian Commodity Exchange traded at 10,284 yuan versus Wednesday's close at 10,222 yuan. ICDX's July CPO futures contract was at 9,550 rupiah per kg, compared to 9,525 rupiah per kg when it opened. Market volume was 1,339 lots of 10 tonnes each.
"For the physical market, things are still slow," the trader added. "We don't see demand coming in ... most of our buyers are still waiting for lower levels, which they think will come." Palm oil - used in products such as food, cosmetics, tyres and biofuels - fell in the last three sessions and is down about 2 percent this week.
"Shorter term production will probably be cyclical and weather driven," said one analyst. "On this basis, the expectation is for a cyclical recovery in 2011 compared to two years of weakness." On Monday, benchmark palm oil prices hit a near two-week high at 3,384 before falling after export data dented sentiment.
The data showed that exports of Malaysian palm oil products for April 1-25 fell 7.7 percent to 865,593 tonnes from 937,591 tonnes shipped during March 1-25. Analysts have warned of higher palm production in Southeast Asia, which produces more than 90 percent of the world's output, as it enters a higher cycle in the second half of the year. "We do think that prices will come off because production is going to recover seasonally and you can't stop that," said a second analyst. "It has already started."