Palm Oil Developments No.48 (June 2008) p26-30

Prices of selected Oils and Fats and the Prospects of Palm Oil Price in 2008

RAMLI Abdullah

The oils and fats sector has been bullish for the past few years. The sector enjoyed continuous surging prices since 2006 until the middle of 2008. Analysts related this scenario to the movements of fossil fuel price in the world market which recorded a similar trend. The surge in fossil fuel prices is mainly due to the political instability of most oil-producing countries, concerns about the environment, as well as long-term threats from depleting petroleum reserves. As a result, prices of petroleum as well as oils and fats were seen to be up-trended while showing a high correlation during the period. Palm oil price, for example, has been swaying to the tune of the petroleum price. The analysts hypothesized that the price of petroleum has become a new contributing factor affecting the prices of oils and fats. However, the scenario prior to 2006 was quite different as there was a mixture of relationships between prices of petroleum and those of oils and fats, and they moved quite independently. They showed negative correlation in some periods while being positively associated in others. Besides this new petroleum price factor, the role of stocks in influencing prices of oils and fats has gradually become less important, especially for palm oil. In the past, high stocks often caused the price of palm oil to decline and vice versa. However, the situation is different at present as the price and stock of palm oil together had increased or decreased during the same time. It is difficult to predict how long this relationship will stay, as it defies the traditional theoretical economic relationship.

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