In my previous article on Malaysian crude palm oil futures, I suggested investors to stay away from the market for a while. Most of the analysts anticipated a sharp decline in the prices of Malaysian crude palm oil futures on the Bursa Malaysia Derivatives Exchange following the downward movements of the crude oil prices and sluggish demand for the Malaysian palm oil in the international markets.

Prices of Palm oil futures usually tend to follow the pattern of crude oil price movement. When the crude oil prices decreased sharply in the international market in July, the Palm oil benchmark October contract prices also hit 8-month low last week on Wednesday, July 23, 2008. The October contract fell 7 percent to 3,027 ringgit a ton on that day, which is in fact the lowest since December 24, 2007. Moreover other bearish factors, for instance, delay in the launch of biodiesel mandates in Malaysia's domestic market and reduction in palm export taxes by Indonesian government also affected the palm oil market in a negative manner.  Later on the benchmark contract rose 2.8 percent on July 24, 2008 mainly on short-covering.

The demand forecast for the palm oil is not very promising even before the Muslim fasting month of Ramadan, starting from the first week of September. Usually Buyers in China, India, Pakistan and Middle Eastern countries tend to buy edible oils at least two or three months before the commencement of the holy month of Ramadan. But this year the production cycle of Malaysian palm oil is quite high and has resulted in swelling of palm stock to record level of around 2 million ton in July. Moreover, the demand of edible oil and especially the palm oil for Ramadan has been overstated. So a comparatively low demand and high supply of palm oil are also going to have a negative impact on the prices of Palm oil futures.

Indonesia has also announced to cut export taxes for palm oil products in August. This move will bring help reduce their prices. This decision will lead to more competition for the Malaysian palm oil products and more demand shifting from the country. The doubts expressed by Malaysian authorities on the feasibility of biodiesel this year will add to the overall bearish trend in the Malaysian palm oil markets that has already been set there by falling crude oil prices, and high stocks of palm oil.