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Asia Biofuels Update: Palm Oil Drops to One-Week Low on Declining Crude Oil

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Malaysian palm oil futures hit one-week lows on Thursday, as crude oil prices retreated to pre-war levels, and as the local currency continued to recover, dampening export competitiveness.

The Bursa Malaysia Derivatives' July crude palm oil contract lost 1.14% to 4,523 Malaysian ringgit ($1,089.62) per metric ton. The August crude palm oil contract dipped 1.39% to 4,540 ringgit/mt.

Lower crude oil prices erode biofuel economics and make feedstocks like palm oil less attractive, according to Iceberg X trader David Ng, as cited by Bloomberg.

A strengthening Malaysian ringgit also pressured prices. It firmed against the US dollar for a third consecutive session on Thursday, rising by a further 0.54% and making exports more expensive for foreign buyers.

This weighs on Malaysian shipments, which have so far shown a 19.1% to 25% month-over-month growth in the June 1-20 period, based on latest cargo estimates.

During the same period, the country's crude palm oil production rose 4.76% from a month earlier, media outlets reported, citing estimates by the Malaysia Palm Oil Association.

However, a developing El Nino weather phenomenon could impact yields and reduce output going forward.

The last strong El Nino episode, which occurred from early 2015 through mid of 2016, curbed palm oil yields by 8.3% in Indonesia and 14.2% in Malaysia, according to S&P Global Energy.

In Indonesia, the July 1 rollout of a higher biodiesel blend of 50%, relative to the current ratio of 40%, will also reduce exportable supplies.

Against this backdrop, analysts and industry bodies expect prices to remain supported in the coming months.

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