09/11/2010 (Agrimoney.com) - Palm oil prices are "ripe for a fall" thanks to a rise of up to 44% in Malaysian inventories by the end of the year, Rabobank has said.

However, palm ended higher on Monday, helped by a forecast from commodities consultancy LMC International that a strong oil price could underpin palm despite rich stocks.

A report from Rabobank's London office cast doubt on a forecast by traders of robust Malaysian exports of 1.42m tonnes last month, a figure only 40,000 tonnes below the 2009 record set in July.

"This [forecast] is surprising given the large stockpile build-ups in China and India which were expected to depress demand," the report said.

"It is unlikely that demand will remain this high."

'Downward correction'

Malaysia's own stocks could jump from current levels of 1.65m tonnes to 2.37m tonnes by the end of the year, creating a "bearish price environment over the closing months of 2009".

"Palm oil prices look set for a downward correction," the report said.

The commodity's "increasingly bearish" supply and demand fundamentals defied a dip in output in Malaysia, the world's second-ranked producer after Indonesia, which may prove more severe than official forecasts show.

Rabobank pegged Malaysian production, which has been hurt by tree stress after last year's bumper crop and by dry weather, at 17.2m tonnes this year, 400,000 tonnes below the Malaysian Palm Oil Board forecast.

Technical indicator

The poor outlook for palm prices had already been reflected in the shape of the futures curve, which had over the last two weeks developed a clear premium for later contracts over nearer ones for the first time in a year.

The development "demonstrates the growing concern that a build-up in palm oil stocks is imminent", the report said.

"This shift in dynamics is a bearish signal for near-term price movements."

Importance of oil

Nonetheless, Kuala Lumpur's benchmark January palm oil contract ended 0.9% higher at 2,266 ringgit a tonne, helped by a forecast from LMC chairman James Fry that prices could hit 2,625 ringgit a tonne by April if the oil price remains buoyant.

"Since January 2007, the crude oil price has been the strongest determinant of vegetable oil prices," said Mr Fry, whose forecast was based on Brent crude remaining near $75 a barrel.

"The traditionally strong influence of Malaysian crude palm oil stocks on prices has declined.

"Stocks are still important, but they now have their impact within a price band determined by crude oil prices via the link to biodiesel demand."

The Malaysian Palm Oil Board will on Tuesday unveil October data for Malaysia's palm production, exports and inventories.