Renewed euro zone fears drag on palm oil futures

KUALA LUMPUR: Malaysian palm oil futures slipped on Tuesday on concerns over the effectiveness of the euro zone bailout package, although a focus on heavy rains stalling production of the vegetable oil limited losses.

Risk appetite waned after Greece decided to put the country's bailout to a referendum, casting doubt on the euro zone's plan to stem the debt crisis and prevent economic growth from stalling.

Palm oil markets derived some support from concerns that heavy rains at the end of the year could stall harvesting and inundate estates as export demand remains robust.

Weather offices around the world have confirmed a La Nina weather phenomenon, which brings heavier-than-usual rains to Southeast Asia, is developing in the region and will coincide with the monsoon rains at the end of the year.

"The headswinds from the euro zone sent another chill through the markets, which pushed an emerging bullish scenario for palm oil out of the window," said a trader with a foreign

commodities brokerage.

"This will be the pattern for a while. We will have choppy trading for some time," the trader added.

Benchmark January palm oil futures on the Bursa Malaysia Derivatives Exchange settled down 0.5 percent to 2,923 ringgit ($952.738).

Overall traded volumes stood at 21,395 lots at 25 tonnes each, compared to the usual 25,000 lots as investors remained cautious over the state of the global economy.

Technicals were slightly bearish, with Reuters analyst Wang Tao saying palm oil will fall further to 2,881 ringgit per tonne, as a rebound that started from the Oct. 6 low of 2,754 ringgit has been completed.

Malaysian media on Tuesday cited Malaysia's Deputy Prime Minister Muhyiddin Yassin as saying weather reports indicated the impending rains could be "devastating" and the floods could be the worst in decades.

La Nina-driven floods earlier this year last swamped oil palm estates in Malaysia's top growing states of southern Johor bordering Singapore and Sabah on Borneo island in mid-February, pushing prices to a 2011 high of 3,967 ringgit.

For now, production appears to be strong with traders expecting Malaysian palm oil stocks to record an increase despite the strong export data reported for October the previous day.

"It looks like the fundamentals are going to change again, the high stocks we have are eventually going to come down if La Nina storms in," said another Malaysian trader.

Other related markets were under pressure.

Brent crude oil futures fell more than $2 per barrel on Tuesday on the Greek referendum move.

US soyoil for December delivery dropped 1.2 percent in Asian trade as strong progress with soybean harvests weighed on the soy complex.

China's most active May 2012 soybean oil contract also fell on global macro-economic fears.

"From a macro and fundamental perspective, the market's focus this week would be on the G20 summit," said Huang Zhi Qiang at Guotai Junan Futures, referring to the meeting in Cannes, France on Nov. 3-4 that will focus on the euro zone crisis.

Copyright Reuters, 2011