13/01/2011 (The Malaysian Insider) -  Betting on a scenario of erratic weather sapping vegetable oil supplies and strong Asian demand, investors have been snapping up Malaysian palm oil till it hit a 33-month high last week.

The key RM4,000 mark is not that far off, they say, although many in the vegetable oil markets are starting to think the rally may have run its course as demand starts to slow.

With palm oil in negative territory since the start of the year, is it time to buy on the current weakness or continue selling?

Some analysts are holding on to a buy view despite cash palm olein trading at a tight discount to South American soyoil, and at times, going into a premium in the past two months.

“Demand destruction for palm oil only happens when a competing vegetable oil is in ample supply. We don’t see ample production for soyoil at all,” said Michael Greenall, a Kuala Lumpur analyst with BNP Paribas.

For now, Indonesian and Malaysian palm oil output will still be weak in the first quarter, owing to last year’s erratic weather affecting yields, planters say.

But with China running down US soy stocks, analysts cutting the forecast for Argentine crop due to a dry spell and generally lower crushing yields for soyoil, supplies are going to be much tighter.

“Palm oil hitting RM4,000 is a given but the question is how long will it stay there. There is some demand slowdown but it’s across the board and not a cause for concern,” said a Malaysian refiner. “But I have stopped selling forward because of the volatility.”

Palm oil prices stayed above RM4,000 for 10 days in March 2008 before plunging in the wake of massive sell-off in crude oil and the start of the financial crisis.

“At that time it was speculative bubble but now we are talking about real supply constraints and strong demand, it is scary. The Argentine crop is the wild card,” BNP’s Greenall said.

The impact of dry weather on the critical pod-setting period for South American soy crops may have been overblown, the bears say.

“Argentina may be affected but the Brazilian crop seems to coming along nicely. There will be a decent level of soyoil supplies at a time when palm oil production rises in the second half,” said a regional vegetable trader in Singapore.

Palm oil prices have rallied 19 per cent since November when production did not hit its seasonal peak with concerns about the Argentine soy crop giving an added boost later on.

“New catalysts need to come into play to prevent palm oil price from undergoing a deep correction, which we believe is already in the making,” said OSK Investment bank in a note to clients.

For leading industry analyst M.R. Chandran, palm oil has already peaked at the RM3,700-3,900 range and high prices will limit tropical oil’s market share.

“The RM4,000 level is unlikely to happen. Weather issues are there but nothing is very certain with the soy crop situation,” said the former head of the Malaysian Palm Oil Association.

“Big buyers like China and India will jump to get soyoil when palm oil is this expensive. And once buyers get into soyoil, it will be hard to switch out as they would have gone long on the commodity,” Chandran said.