As crude oil market softens much beyond expectations of many

G. Chandrashekhar

Mumbai, Sept. 20

With crude market softening much beyond the expectation of many and current energy market fundamentals not in support of a price spike anytime soon, in tandem with rising global output of oilseeds and vegetable oil, the hype generated by vegetable oil producers, especially palm oil producers, about looming bio-diesel demand is in danger being whittled down.

Reports from different parts of the world suggest that investors in bio-fuel sector have now begun to put their investment plans on hold because of falling energy prices and uncertainty over future trends. This is especially true of bio-ethanol units. As compared with bio-ethanol (from cane or corn), around the world, investment in bio-diesel production is considerably lower.

Malaysia itself is currently sitting on a huge inventory of 1.7 million tonnes (mt) crude palm oil, which is expected to expand soon to register a new high of 2.0 mt as a result of rising output and sluggish exports. Since last year, Malaysia's peak production season is seen extending to October/November.

The US soyabean crop for 2006-07 initially forecast slightly less than 80 mt has now been revised upwards to 84.2 mt. Also, the carryover stock of oilseeds will be higher than previously estimated.

According to US Department of Agriculture, in 2006-07, world production of major vegetable oil would be 120.5 mt, some 3.5 mt higher than in the previous year.

With oilseeds crop harvest set to begin in major producing countries, supply is sure to considerably ease in the coming weeks. In addition, the pace of imports by two of world's largest importers China and India, has been slow and below market expectation.

So, overall, the global vegetable oil market may be set for a correction downward. Crude palm oil market has been hovering around RM 1550 a tonne. It should come as no surprise if the market were to drop by anything between 50 and 100 a Malaysian ringgit tonne, weighed down by burgeoning inventory and sluggish sales.

Similarly, soyabean oil has a down side of at least 5 per cent from the current levels.

The market would of course pause and look for fresh direction sometime late November/early December depending on planting conditions in South America.

On current reckoning, soyabean acreage in Brazil and Argentina is likely to be lower by 5-7 per cent.

Latest information from the US suggests that 2.7 mt of soyabean would be used this year to produce around 150 million gallons of biodiesel.

Given the fairly balanced global vegetable oil demand-supply situation for 2006-07, non-fundamental factors may play a big role in impacting prices.

What view non-commercials (speculators) take about market movement in the months ahead would be a key determinant of forward prices on the bourses.

(This article was published in the Business Line print edition dated September 21, 2006)
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