KUALA LUMPUR: Malaysian palm oil traded at its highest in over a year yesterday, boosted by domestic supply-demand dynamics, and the rise in global commodity rates.

Analysts said the anticipation of falling palm oil stock levels in the country amid an ongoing production downcycle of the commodity and firmer crude oil prices had spurred prices of the agriculture commodity.

“It’s a little bit of both (internal and external factors),”  ECM Libra Investment Bank Bhd senior analyst Arhnue Tan told The Edge Financial Daily over telephone yesterday.

Crude palm oil (CPO) prices for March 2010 delivery gained as much as 1.3% to RM2,698 a tonne during the first trading day of the year, before finishing at a 16-month high at RM2,680, up 0.6% from the previous close of RM2,663 on Dec 31, 2009.

Latest updates by the Malaysian Palm Oil Board show that local CPO production in November last year fell by a monthly pace of almost 20% to 1.6 million tonnes, while combined CPO and process palm oil stock declined 2% to 1.93 million tonnes.

Crude oil pierced the US$80 (RM273.60) a barrel mark yesterday, the first time since October last year, as traders  predict that an economic recovery in the US, the world’s largest economy, would fuel demand for the hydrocarbon resource.

Freezing winter conditions in the world’s largest energy user, have also prompted expectations that demand for winter fuels such as heating oil and natural gas will increase.

Costlier crude oil usually drags agriculture commodities such as oil palm and soybean into investors’ radar. This is because prices of these crops tend to rise in tandem with crude oil rates due to demand for food-based commodities as feedstock for production of biofuel, deemed a cheaper alternative to hydrocarbon  resources.

Expectations of rising inflation also result in demand for commodities as a hedge against rising prices due to the fact that commodity rates tend to rise in tandem with consumer prices. As demand for goods increases, prices of the items climb as well, hence, pushing up prices of commodities used to manufacture these goods.

At the local bourse yesterday, the Kuala Lumpur Plantation Index gained 0.2% or almost 14 points to finish at 6,376.86. Prime movers of the benchmark include shares of Far East Holdings Bhd which advanced 25 sen to RM6.75 and Genting Plantations Bhd which rose six sen to RM6.30. TH Plantations Bhd was up four sen at RM1.50.

The local plantation index of 43 companies had gained 53.59% last year, outperforming the FBM KLCI’s 45.17% rise.

This article appeared in The Edge Financial Daily, January 5, 2010.