SINGAPORE (Sept 12): The volume of open positions in Malaysian palm oil futures jumped to a record high this week, suggesting the market may be bottoming out after falling to its lowest price in more than five years.

Palm oil, which has lost almost a quarter of its value this year, dropped to 1,914 ringgit ($598) a tonne last week, the lowest since March, 2009, on expectations of near-record world vegetable oil supplies and slowing demand.

But prices have since rebounded to above 2,050 ringgit after the Malaysian government scrapped export taxes on the oil for September and October in a bid to boost shipments and curb rising stockpiles.

The tax cut also triggered a wave of ownership transfer and position shuffling, with open interest on the Bursa Malaysia Derivatives Exchange climbing to an all-time high of 287,859 contracts on Wednesday and traded volume last week of nearly 70,000 lots, double the daily average.

Open interest refers to the total number of active or outstanding contracts, reflecting the flow of money into a market.

Traders say there are a number of reasons behind the upturn in participation.

Some plantation companies, worried that palm oil prices may decline below the cost of production at 1,700 ringgit a tonne, have sold part of their output in the futures market while profits are still attainable, traders said.

At the same time, refiners have stepped up buying crude palm oil (CPO) to lock in supplies after the Malaysian government exempted the commodity from export taxes.

"Some participants want to lock in prices as they view them as cheap - these are refineries, importers and investors, so we are seeing more people who are long in this market," said Alan Lim, an analyst at Kenanga Investment Bank in Kuala Lumpur.

"The demand from overseas investors has increased after Malaysia abolished the export tax."

As a direct impact of the tax exemption, Malaysian palm oil exports for Sept. 1-10 rose around 40 percent from a month ago, according to cargo surveyors Intertek Testing Services and Societe Generale de Surveillance.

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Palm oil is widely used as a cooking oil as well as a renewable fuel, so recent gyrations in the price spread between it and substitute products such as soybean oil and gas oil have also triggered an uptick in interest.

"Some of the spreads between palm oil and other vegetable oils or gasoil are so wide now that you might get speculators taking reasonably large positions, given the dislocation in palm oil prices relative to everything else," said one Melbourne-based fund manager. He declined to be named as he was not authorised to speak with media.

"Energy guys are certainly looking at it and saying our positioning in and around that market should be four times bigger because your downside from that level is not that much but your upside from that price is quite substantial."

The spread between Malaysian crude palm oil and gasoil <GO005-SIN> quoted in Singapore widened to a 6-year high of around $260 a tonne in August from $62 a tonne earlier in the year.

Similarly, the gap between palm oil and soybean oil prices grew to more than $90 a tonne in late August from around $40 in the middle of that month as palm oil values dropped more than soy oil prices. But since Sept. 1, palm oil prices have risen more than 5 percent compared to a roughly 2-percent decline in soyoil.

A tendency for palm oil prices to rally over the final quarter of the year as seasonal demand picks up and production drops has also prompted increased ownership interest.

Malaysian palm oil futures have finished the fourth quarter on a positive note for over two decades, with prices notching up a gain of almost 15 percent in October-December last year.

(1 US dollar = 3.1995 Malaysian ringgit)