UPDATE: Crude Palm Oil (CPO) Prices May Rise To MYR2,625 By April 2010

Crude palm oil prices may rise to MYR2,625 a metric ton by April if Brent crude oil prices hold steady at $75 a barrel as more vegetable oils are used for biodiesel amid a rise in demand for the clean fuel, industry analyst James Fry said Monday.

The growth in biofuel production, mainly driven by mandates in many countries, amplifies crude oil's rising influence on vegetable oil prices, including palm oil.

Fry also said if Brent crude fell $10 to $65/bbl, palm oil prices would then ease to MYR2,350/ton.

"Instead of stocks as a main price driver, crude oil is now a major influence for (vegetable oil) via the link to biodiesel demand," said Fry, chairman of UK-based LMC International Ltd., at a regional palm oil conference.

"Since January 2007, crude oil has become the strongest determinant of vegetable oil prices. Stocks, which used to play a strong influence on palm oil prices, have declined (in importance)."

CPO prices were under pressure the past few weeks on fears domestic palm reserves have reached 1.75 million-1.80 million tons as output continued to outpace demand.

Trade participants fear palm oil stocks may rise further in November, but a stronger crude prevented a slide in prices.

Fry said Malaysian palm oil stocks may rise in November and December as palm oil production gathers pace, but added stocks aren't likely to rise above 1.9 million tons.

Fry also said Malaysia's palm oil production in 2010 may rise above 2008's production of 17.7 million tons as palm trees recover from biological tree stress.

Biofuel mandates in Germany and the U.S., both major biodiesel consumers, have made soy prices more sensitive to non-food demand.

"The swings in monthly (biofuel) demand in the US and Germany have reached over 250,000-300,000 tons (a year), which are large in relation to the much more stable growth in world food demand," Fry said.

Even though palm oil isn't widely used in the European biofuel sector due to environmental concerns, palm is increasingly used as a substitute for soyoil and rapeseed in food.

"For this reason, non-tariff barriers, like those proposed against palm oil in biodiesel use in the EU, act mainly as an irritant," he said.