[KUALA LUMPUR] Malaysian palm oil futures dropped to their lowest level in three weeks on Thursday as the ringgit ticked up and crude oil prices continued to languish, but tight supplies of palm after flooding provided some support.
The drop in crude oil prices, which have more than halved since June, coupled with poor demand for palm oil in January left the tropical oil struggling to find strong support after breaking below RM2,300 on Wednesday.
The benchmark April contract ended down 1.2 per cent at RM2,245 (US$624) per tonne, at the lower end of the day's range. It had fallen as far as RM2,242, the lowest since Jan 2.
"Sentiment is bad. There's liquidation in the market and a massive decrease in open interest," said a commodity trader with a Malaysian-based plantation.
Market players say prices might receive some support from the impact of monsoon flooding across parts of Peninsular Malaysia and currently in Borneo, which has crimped the supply of palm and would probably eat into stockpiles.
"On the physical side, there are some supply constraints. So even though demand is not good, production is not robust," the trader added. "January end-stocks are likely to decline below 2 million tonnes and the market will hold, aided by the weak ringgit." Traded volume stood at 54,641 lots of 25 tonnes, much higher than the usual 35,000 lots.
The Malaysian ringgit edged up 0.3 per cent in late trade but was still around its weakest in nearly six years at 3.6000 per dollar. A weak ringgit makes the ringgit-priced palm feedstock cheaper for overseas buyers.
A US Department of Agriculture report cut the forecast for Malaysia's palm oil output for 2014/2015 by 7 per cent to 19.7 million tonnes from 21.25 million, with monsoon floods expected to further dent seasonally weak yields this month.
"The lower seasonal production cycle will only be exacerbated by the disruptions in collection, transport and processing causing by the lingering effects of the flooding," according to the report.
In some areas, it may take up to three months to repair damaged infrastructure, it said.
In other markets, Brent crude oil dipped towards US$48 a barrel on Thursday ahead of an expected decision by the European Central Bank to start buying bonds, which could push the dollar to new highs and put downward pressure on commodities.
In other vegetable oil markets, the US soyoil contract for March fell 0.4 per cent in late Asian trade. The most active May soybean oil contract on the Dalian Commodity Exchange lost 0.4 per cent.