Palm oil hits $1248 per tonne, crosses psychological M$4000 barrier for first time; oil at $102, $4 gas in sight for summer

February 29, 2008

In Malaysia, palm oil futures crossed the psychologically important M$4000 barrier, reaching $1248 per tonne (M$4,001) for the benchmark May contract. The May contract has increased 32 percent since the beginning of the year on concerns over inadequate supply to meet rising demand from the food sector, and biodiesel producers.

Yesterday, Godrej International projected that crude palm oil will reach a price of $1400 per tonne in the September 2008 - February 2009 period. Oil World projects $1090 per tonne in 2008; LMC International forecasts $1213 per tonne in 2008m, while Prudential Bache forecasts a range of $930-$1550 per tonne.

Palm oil surged 6 percent to a record high earlier this week on the Bursa Malaysia derivatives exchange, with the benchmark May contract reaching $1216. Strong demand from China and India for palm oil is causing the price escalation.

In the US, the American Automobile Association advised drivers to brace for $4 per gallon gasoline this summer, as the impact of $102 per barrel oil is felt. “American consumers know these oil prices are an unpleasant omen of events likely to occur at the nation’s gas pumps over the next few months,” Geoff Sundstrom, an AAA spokesman, told Reuters. “In some regions of the country the average price could approach $4 per gallon.”

Providing more background to the reserve stock shortages, the International Food Policy Research Institute recently released a report saying that the world is eating more food than it produces, and that biofuel production runs the risk of creating social unrest. The report projected a 66 percent increase in the price of corn and a 50 percent increase in oilseed prices by 2020, attributed to biofuel production. The report also said that global cereal stocks have fallen to their lowest levels in more than 15 years.