The spike in oil prices prompted the market to revisit the long-term fundamentals of the oil and gas sector, adding to the lustre of food-based commodities as feedstock for biofuel production. Costlier hydrocarbon fuel has pushed commodities such as palm oil and soybean onto the investors’ radar screen, making their prices rise in tandem.

Last week, top officials of the global aviation fraternity highlighted the importance of harnessing alternative energy to ensure the survival of the airline industry, whose earnings had been eroded by costlier jet fuel.

Commodity traders also foresee demand for biofuel due to global policymakers’ commitment to reduce  greenhouse gases.

“There will be demand and support for ethanol-produced goods which come from palm and soybean oil,” Alpha Financial Technologies LLC (AFT) chief executive officer Victor Sperandeo told The Edge Financial  Daily in an interview.

Sperandeo, popularly known as “Trader Vic”, is a professional Wall Street trader and fund manager with over 40 years of experience in the commodities, equities, bonds, futures and options markets.

AFT has a strategic  collaboration with The Royal Bank of Scotland to develop a managed futures index.

The Trader Vic Index is made up of a diversified basket of 24 futures contracts comprising physical commodities, world currencies and US interest rates.

Malaysia has indicated its commitment to biofuel. Last October, lawmakers mandated the use of a 5% palm-fuel blend with fossil diesel in government vehicles.

In May this year, Deputy Plantation Industries and Commodities Minister Datuk Hamzah Zainudin said the government had no intention to reduce the biodiesel mandate of 5% despite costlier feedstock.

Anticipation of higher inflation has spurred demand for commodities as a hedge against rising prices, as prices of commodities also tend to rise with consumer prices.

Sperandeo said global inflation could rise next year, fuelled by government spending and, possibly, policymakers printing more money.

A larger supply of US dollars in the market, for example, will weaken the greenback. As crude oil is transacted in US dollars, a weaker US currency, essentially, makes the commodity more  attractive to global traders, hence, higher demand and prices for the hydrocarbon resource.

On whether the market will again see crude oil prices touching the historical high of US$147 a barrel seen  last July, the professional trader-cum-author said: “I believe we will. The question is when. The real risk is geopolitical.”

OSK Research Sdn Bhd analyst Jason Yap said demand and supply dynamics did not always dictate crude oil prices, as factors such as the strength of the US dollar also played a role.

“As long as there is profit to be made, new jobs should flow out soon and this would benefit the local oil and gas supporting companies in terms of order book replenishment and also sustain charter rates,” said Yap, who was overweight on the local oil and gas sector.

Meanwhile, ECM Libra Investment Bank offered its view on the link between potential weather changes and crude palm oil (CPO) prices.

Anticipation of dry weather in Southeast Asia and Australia between June and August 2009, due to the possible onset of El Nino, is expected to curb the output of palm oil, pushing up its price.

The El Nino and La Nina phenomena, and their contrasting effects, are due to temperature changes of the ocean surface, resulting in dry and wet spells in different parts of the globe. For example, El Nino is expected to cause dry weather in Southeast Asia while the Americas is anticipated to experience wet conditions.

“Should this weather phenomenon occur in a severe manner, we believe it would create more legroom for CPO prices to run. We note that for now, it is only the very early stages of this weather development, hence, the outcome is  highly uncertain,” wrote ECM Libra, which maintained its overweight call on the local plantation sector.

The research house’s view also took into account lower production of rival crop soybean and rising crude oil prices.

Drought in major soybean producing countries such as Argentina has curbed output of the commodity, resulting in the  rise in CPO prices as both are substitutes to each other.

Nomura International (Hong Kong) Ltd head of regional strategy for Asia research division, Sean Darby, said: “Supply disruptions remain a volatile factor in 2009, with drought, farmers’ strikes as well as ongoing difficulty in raising trade finance conspiring to suggest that problems will linger well into the next planting season.

“Ironically, whereas in the past soft commodity prices would lag other harder commodities as an economic recovery took hold, this cycle has seen soft prices leading the way.”

Malaysian CPO prices have risen to the RM2,500 a tonne level compared with around RM1,800 in March this year. The Kuala Lumpur Plantation Index has risen 32% this year, outpacing Kuala Lumpur Composite Index’s 24.3% gain.

This article appeared in The Edge Financial Daily, June 15, 2009.