Palm oil extends gains as lower production forecast stokes supply fears

Malaysian palm oil futures extended gains to hit a near three-year high on Friday, buoyed by supply concerns after industry bodies forecast lower inventories and on hopes of higher domestic consumption. The benchmark palm oil contract for March delivery on the Bursa Malaysia Derivatives Exchange rose 25 ringgit, or 0.9% to 3,030 ringgit ($733.83) by the midday break. It hit an intraday high of 3,047 ringgit, its highest level since Feb. 15, 2017. It had risen 2.8% in the previous session.

"Supply constraint fears are keeping prices firmer on a daily basis, however the market is equally worried about 'demand destruction' with the current high prices," said Paramalingam Supramaniam, director at Selangor-based brokerage Pelindung Bestari Sdn Bhd.

The Malaysian Palm Oil Association and the Southern Peninsular Palm Oil Millers Association had registered lower-than-expected fall in December production at 16% and 27% respectively, from the month before, he said.

"We anticipate seeing a decent correction before prices continues its rally," Paramalingam added. Yield of the tropical oil is also expected to be lower in the first half of 2020 due to poor rainfall and lower fertiliser usage in top producers Malaysia and Indonesia earlier this year, according to traders and analysts. Exports of Malaysian palm oil products for Dec. 1-25 fell between 8.5% to 12.8% from a month earlier, according to cargo surveyors.

However, domestic consumption is expected to increase as Malaysia and Indonesia are pushing higher palm bio-content requirements in their 2020 bio-diesel programmes.

A rally in rival edible oils is futher boosting palm prices. Dalian's most-active soyoil contract gained 2.2%, while its palm oil contract jumped 3.2%. Soyoil prices on the Chicago Board of Trade were also trading higher at 0.6%.