06/08/2009 (Bloomberg) - Palm oil futures dropped, ending the longest rally in six months, tracking crude oil and soybean oil lower. Palm oil is a substitute in fuel and food applications.

Crude oil fell from a seven-week high after stockpiles in the U.S., the largest energy-using nation, increased as refiners reduced processing.

October-delivery palm oil declined 0.4 percent to 2,325 ringgit ($666) a ton on the Malaysia Derivatives Exchange. Futures advanced more than 10 percent in the previous five days, the longest gain since the period ended Feb. 10.

Soybean oil, the main rival for palm oil, lost 0.9 percent to 37.9 cents a pound at 6:07 p.m. Singapore time. Still, it is 25 percent more expensive than palm oil, compared with a 12- month average of 42 percent, according to Bloomberg data.

“The market is now worrying that the narrower discount gap will eventually trigger the switch back to soybean oil,” said Leow Huey Chuen, analyst at UOB Kay Hian Malaysia Holdings Sdn., said in a report today. “If this situation persists, do expect crude palm oil price to weaken.”

Still, as long as oil stays above $70 a barrel, confidence in palm oil prices staying high will remain as demand in China and India, the largest markets, is strong, Nirgunan Tiruchelvam, an analyst at RBS Asia Securities Singapore Pte., said by phone. Supplies may be curbed because of lower yields from tree stress, less use of fertilizer and unfavorable weather, he said.

Crude oil in New York declined as much as 1.1 percent to $71.19 a barrel and last traded at $71.60 a barrel at 6:03 p.m.

Crude above $70 oil would spur demand for bio-diesel that could drive palm oil above $800 by the year-end amid, James Fry, managing director of UK-based agricultural industry consultant LMC International Ltd., said Aug. 3.

Palm oil has gained 35 percent this year, as drought curbs soybean crops in South America. The U.S., the largest soybean grower ahead of Brazil and Argentina, will release data on its soybean crop next week.