Malaysian palm oil futures fell on Tuesday after hitting a two-week high earlier in the session as traders shifted their focus to ample supplies of the tropical oil and the incoming South American soy crop. The market initially rose on expectations of improving export demand for palm oil as it becomes cheaper than soyaoil that has gained after the US Department of Agriculture data showed tight soybean stocks.
Traders say the palm oil market may gain on Wednesday after China raised its key interest rates for the second time on Tuesday as the move signals that the economy and demand is strong.
"Palm oil may have fallen today on South American crop prospects but the China rate move is not going to trigger a sell-off like it did in the past," said a trader with a foreign brokerage in the Malaysian capital. "The rate hikes are almost a normal occurrence," the trader said. The benchmark June crude palm oil contract settled down 0.5 percent to 3,366 ringgit ($1,112.323)a tonne, after going as high as 3,399 ringgit - a level unseen since March 22.
Overall traded volume stood at 17,041 lots of 25 tonnes each, compared to the usual 15,000 lots. Technicals look more positive. Reuters analyst Wang Tao said palm oil is expected to rise to 3,470 ringgit per tonne, as it has successfully cleared a trendline resistance at 3,365 ringgit.
Palm oil supply scenario may start weighing on prices. Malaysian production could hit double digit growth in March, traders said. Reuters will issue Malaysia's March production, stocks, and export poll on Thursday. Brazil's 2010/11 soybean crop, which is more than two-thirds harvested, is seen at a record 70.56 million tonnes, up from the March view of 69.8 million tonnes, grains analysts Celeres said on Monday.
But showers in central and northern Brazil are hampering soy harvest although Argentina's harvest weather is favourable. US soyaoil for March delivery dropped 0.3 percent, erasing some gains on the incoming soy crop and in a knee-jerk reaction to the rate move although some traders said it should be a modest fall. China's financial markets are closed for two-day Qingming or tomb sweeping festival. Trade will resume on Wednesday.
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