02/12/2009 (Agrimoney) - While shares often enjoy a so-called "Santa rally" in December, palm oil may be poised for a Christmas crunch as heavy inventories take their toll.

The end-of-year-period, often an unexciting time for palm prices, possesses a particular "potential for a setback" this time, given rich stocks in both producing and importing nations, Oil World said in comments ahead of a key conference in Bali.

Indonesia, the world's biggest palm producing country, has inventories of 1.8m-1.9m tonnes, while second-ranked Malaysia has stocks of 2.0m tonnes, the German-based analysis group said, highlighting high stocks in major consumers China and India too.

"Following the noticeable appreciation, we consider palm oil prices to be overvalued and vulnerable to a temporary setback," Oil World said.

The comments come ahead of a talk on Thursday by Oil World boss Thomas Mielke on palm oil supply and demand trends to the Indonesian Palm Oil conference.

Production prospects
Palm oil prices have rallied more than 20% since early October in Kuala Lumpur, driven by concerns over the impact of monsoon flooding on plantation output, and last week matched their highest levels since June.

Estimates for Indonesian palm oil production
Official Indonesian estimate: 22m-23m tonnes (for calendar 2010)
Oil World: 22.4m tonnes (for calendar 2010)
USDA: 20.8m tonnes (for 2009-10)
 
However, Oil World added that the potential for a drop in prices "could be limited" by a seasonal dip in production early in 2010, "enforcing a decline in stocks".

"Consumers may take price dips as a buying opportunity and extend coverage ahead of the production deficit shaping up for vegetable oils worldwide in 2010," Oil World said.

The group last week forecast that Malaysia's palm oil production had "only limited upward potential" next year, constrained by an increase in oil palm replantings and tree stress caused by below-normal rainfall this year.

Indonesia's output, however, will rise by 1.7m tonnes to a record 22.4m tonnes, helped by an extra 400,000 hectares of new plantations reaching maturity.