23/2/06 KUALA LUMPUR - Dreams of powering automobiles and energy plants have propelled palm oil prices to a near one year-high before a key industry conference this week in top producing country Malaysia.

But intermittent pressure of late on prices of crude oil - the sole factor that decides the viability of green fuels other than the environment - makes some wonder if producing palm diesel will make economic sense in coming years.

"The whole hype on biofuel was built on the premise that crude oil could easily sustain above $50 a barrel and break $80 or even $100 in the future," said S.J. Dass, marketing manager at Bell Group, Malaysia's largest privately-run oil palm mill.

"But crude hasn't seemed as strong as before and should it slip below $50, you'd have to seriously question the fundamentals for biofuel, which includes palm diesel."

After rising steadily for almost two years, crude oil has turned volatile, going from above $65 a barrel in September to below $58 by November. It touched $67 this month - reviving speculators' hopes of breaking $70 - before slipping again.

It is now supported at above $62, after militant attacks halted supply from Nigeria - the world's eighth largest crude exporter.

More than 1,000 people from the global oils fraternity will gather in Kuala Lumpur on Thursday and Friday to hear price forecasts by speakers who will pin their outlook partly to the potential for biofuels such as palm diesel.

Malaysia, the world's biggest palm oil producer and exporter, is putting up plants to supply a hybrid fuel made up of 95 percent diesel and 5 percent palm oil that domestic petrol pumps are to sell by 2007.

Southeast Asia's second largest economy also hopes to capture a decent share of the growing European market for biofuels.


EUROPE SHORT OF DIESEL

Europe is short of diesel as it has underinvested in refinery production in recent decades while motorists are increasingly switching to the fuel instead of gasoline. The EU has set a non-binding target of 5.75 percent biofuel content by 2010.

"Purely on a price perspective, palm oil looks like a fantastic alternative to rapeseed," said the chief commodities dealer at a foreign brokerage in the Malaysian capital.

"But rapeseed is established as a fuel source. Palm has yet to build a reputation for that and we still don't know if there'll be enough supply of it in the long run to get a critical mass of global market share," the dealer added.

Dutch rapeseed oil is trading above 600 euros ($715) a tonne for March/April, while Malaysian palm oil is hovering at just above 1,470 ringgit ($395).

Dealers expect the Malaysian product to breach 1,500 ringgit - a level last seen in March 2005 - before the end of the Kuala Lumpur conference, based on the bright outlook for most oils.

Thomas Mielke, head of the Hamburg-based Oil World publication and a key speaker at the conference, said on Tuesday world palm oil stocks were seen declining to 3.9 million tonnes as of end-March 2006, down by almost 1.0 million tonnes from early January 2006 and off 400,000 tonnes from a year earlier.

In last week's issue of Oil World, Mielke said Malaysia's palm oil output would see significantly weaker growth this year and global crushings of other oilseeds would have to compensate.

Low rainfall will cause Malaysian palm oil output in calendar 2006 to rise only 60,000 tonnes to 15.02 million tonnes, a sharp slowdown from a rise of 990,000 tonnes in 2005, Mielke said.

Conference participants expect Dorab Mistry, a leading price forecaster from India, to be similarly bullish in his supply/demand outlook for palm and other oils.

Industry veterans say China, the biggest buyer of edible oils after India, will be the key to this year's sales with the end of its government-ordered import quotas.

"There won't be any respite for palm oil prices in the near future," Piyush Domadia, director of Bombay's Vijay Proteins Ltd, told Reuters.

"Chinese demand will surely rise after the end of the quotas. They are just sitting back and working out their needs. Demand is slow but they should soon hit the market in a big way."

(US$1=3.72 ringgit) (1 euro =US$1.19)