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KUALA LUMPUR: Malaysian palm oil futures surged more than 4% on Monday to its highest closing in nearly three weeks, as forecasts of a sharper decline in April output triggered production concerns.

The benchmark palm oil contract for July delivery on the Bursa Malaysia Derivatives Exchange closed up 157 ringgit, or 4.36%, to 3,758 ringgit ($847.35) a tonne.

Palm extended gains to a fourth consecutive session, marking its highest closing since April 18.

Palm oil posts weekly gain on inventory drop expectations, stronger rival oils

The Malaysian Palm Oil Association (MPOA) forecast an 8.3% month-on-month decline in April production, traders said, sparking concerns of a steeper than expected production cut.

By comparison, a Reuters survey last week pegged April production to tick up 0.9%. April inventories were forecast to drop to their lowest level in 11 months as domestic use rises amid flat production.

Anilkumar Bagani, research head of Mumbai-based vegetable oils broker Sunvin Group said this has sparked fears that production is really bad in Malaysia and the market is speculating about a similar situation for Indonesia.

The Malaysian Palm Oil Board is scheduled to release its April supply and demand data on Wednesday.

Also exacerbating production fears is a looming El Nino weather pattern that the World Meteorological Organization forecast will likely happen between May-September. Dry weather as a result of El Nino in main producers Indonesia and Malaysia will cut yields of the edible oil.

In related oils, Dalian’s most-active soyoil contract gained 1.7%, while its palm oil contract rose 3.1%. Soyoil prices on the Chicago Board of Trade were up 0.8%.

Palm oil is affected by price movements in related oils as they compete for a share in the global vegetable oil market.

Oil rose as U.S. recession fears eased and some traders took the view that crude’s recent price slide was overdone.

Stronger crude oil futures make palm a more attractive option for biodiesel feedstock.

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