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Palm oil inventories in Malaysia tumble to 14-month low

[KUALA LUMPUR] Palm oil stockpiles in Malaysia tumbled to the lowest level since February last year as El Nino-induced drought curbed production growth in the world's second-largest grower.

Inventories fell 4.5 per cent to 1.80 million metric tons in April from a month earlier, declining for a fifth month in the longest streak since June 2013, Malaysian Palm Oil Board data showed Tuesday. That compares with the 1.82 million ton forecast in a Bloomberg News survey. Crude palm oil output rose 6.7 per cent to 1.30 million tons and exports slid 13 per cent to 1.16 million tons.

The world's most-consumed cooking oil reached a two-year high in March amid concerns that dry weather would reduce output in top producers. Malaysia's production in April declined 23 per cent from a year earlier and is the lowest level for the month since 2012, according to board data.

"We're at the tail end of El Nino, but judging from the numbers today, it looks like the recovery in production may be a bit weak," David Ng, derivatives specialist at Phillip Futures Sdn, said by phone from Kuala Lumpur. El Nino-linked "impact could continue in the third or fourth quarter depending on how the weather plays out in the next couple of weeks."

Malaysia and Indonesia together make up about 86 per cent of global palm supply. World output may be smaller than previously expected, sliding to 61.25 million tons this year, the first decline in production in more than 20 years, industry researcher Oil World said last week. The lagging effect of drought on trees may lead to lower output into 2017, the Hamburg-based group estimates.

Demand for the tropical oil, used in everything from cookies to margarines as well as biodiesel, may increase as buyers in India, Pakistan, and the Middle East restock ahead of the Muslim Ramadan festive season, Mr Ng said. Malaysia's exports surged 22 per cent to 391,222 tons in the first 10 days of May from the same period a month earlier, cargo surveyor Intertek Testing Services said.

"At this moment, we forecast better export numbers because of seasonal buying," Mr Ng said. Still, "It's too early to assess if the current demand can stay up in the next couple of weeks."

Seasonal demand this year could be weaker than last year as palm oil's narrowing discount to soybean oil may prompt some buyers to switch to the rival edible oil, according to Mr Ng. Soybean oil's premium over palm was at US$67 a ton on Tuesday, below the average of US$99 over the past year, according to data compiled by Bloomberg.

Futures in Kuala Lumpur closed at RM2,661 a ton on Tuesday, down 4.7 per cent from the March high of RM2,793. Prices are still 7.1 per cent higher this year, extending a 9.7 per cent rally last year.

BLOOMBERG