Palm Oil on Track for First Weekly Gain in Three on Supply Risk

May 29 (Bloomberg) -- Palm oil futures advanced, heading for the first weekly gain in three, on speculation vegetable oil supplies won’t keep pace with rising demand.

The oil used in cooking and biofuel has gained as soybean crops decline in Brazil and Argentina, the biggest producers after the U.S., and inventories in the U.S. are forecast to reach a five-year low. The price of palm oil, a substitute for soybean oil, tends to rise when there is a soybean shortage.

“The South American soybean harvest continues to disappoint, and we now expect Argentina production to decline 28 percent year-on-year in 2009 and Brazil to be down 4 percent,” Goldman Sachs (Singapore) Pte. analysts Patrick Tiah and Nikhil Bhandari said in a report today. “Meanwhile, India’s edible oil demand has been stronger than expected due to low prices.”

Palm oil for August delivery on the Malaysia Derivatives Exchange increased 0.7 percent to 2,523 ringgit ($721) a metric ton at the 12:30 p.m. local-time trading break, up from 2,521 ringgit at the end of last week. The oil is headed for the first monthly decline in seven, paring this year’s rally, amid concerns that prices may have run up too quickly.

Still, the outlook is “bullish” given the prospect of soybean shortages and dwindling inventory in Indonesia and Malaysia, Indonesian Palm Oil Board Deputy Chairman Derom Bangun said at a conference in Jakarta today.

“The price is bullish in the medium term,” he said, forecasting a gain to “around $800 per ton,” including costs and insurance, in Rotterdam. Palm oil in Rotterdam has gained 41 percent to $760 a ton this year.

Stockpile Concerns

Bangun raised concerns about palm oil stockpiles in Malaysia, the largest producer after Indonesia. The Malaysian Palm Oil Board said April stockpiles fell to 1,292,303 tons, down 5.4 percent from the previous month and the lowest level since June 2007.

Inventory in Indonesia is also shrinking, he said, without giving the volume. Indonesia does not release monthly data.

Soybeans traded in Chicago have gained 21 percent this year and may climb as high as $14 a bushel by October as Brazil raises the use of crops for energy, Dorab Mistry, director of Godrej International Ltd., said yesterday. That may spur palm oil to advance to 3,000 ringgit a ton within a month, he said.

India may import 8.5 million tons of edible oils in the year ending October, compared with 6.3 million tons in the previous 12 months, of which 5.3 million tons will be palm oil, Mistry said.