Sharp declines in crude oil prices weakened biofuel economics and dragged Malaysian palm oil futures further down on Thursday, although expanding biodiesel programs in Indonesia and Malaysia limited losses.
After prices slumped 2.8% in the previous session, the Bursa Malaysia Derivatives' June crude palm oil contract eased by another 1.19% to 4,493 Malaysian ringgit ($1,149.25) per metric ton in midday trade. The July contract declined by a further 1.27% to 4,521 ringgit/mt.
A strengthening local currency, making exports more expensive, also weighed on prices, with Malaysian ringgit rising by another 0.43% against the US dollar on Thursday.
Export markets in Indonesia and Malaysia have recently softened, largely due to lower shipments to the Middle East due to the ongoing conflict, and weakening demand in India.
A recent rise in palm oil prices have improved competitiveness of rival oils, with Indian buyers preferring soybean oil and sunflower oil over palm oil, according to dealers cited by Reuters.
The price uptrend has also strained demand from Sub-Saharan Africa and Asia, where buyers adopt a more cautious approach in importation and delay purchases until prices normalize, The Edge Malaysia reported, citing Malaysian Palm Oil Council chief executive Belvinder Sron.
In China, demand patterns show a shift from palm oil to palm oil products, giving Indonesia a competitive edge versus Malaysia, Sron reportedly said.
Nonetheless, top Southeast Asian palm oil producers have announced plans to accelerate their biodiesel programs to help secure domestic energy supply, in turn increasing respective local demands for palm oil.
Malaysia will raise palm-based biodiesel blending to 15% from the current 10% beginning June, while Indonesia will increase ratio to 50% from 40% beginning July.
Malaysia's initiative will reportedly absorb an additional 300,000 metric tons per year of palm oil, accounting for 4% to 5% of the country's total palm oil output, which Sron sees as a "modest" impact to the export market.
On the contrary, Indonesia's move is projected to consume an additional 1.5 million metric tons of palm oil annually, significantly tightening exportable supplies, Sron reportedly said.
Analyst Dorab Mistry, as cited by Reuters, expects palm oil futures to remain strong in the coming months due to rising biodiesel demand, with June levels likely to touch the 5,000 ringgit/mt mark and mid-July levels to approach 5,200 ringgit/mt.