KUALA LUMPUR/SINGAPORE (March 2): Crude palm oil (CPO) prices will not drop below $500 a tonne this year if markets for crude oil stay around current levels, leading sector analyst James Fry told Reuters this week.

Palm oil, grown widely in Malaysia and Indonesia, can be used to churn out biodiesel, so its price is often influenced by movements in crude oil markets.

"Where crude oil sets the floor to CPO prices, Brent crude between $60 and $70 will mean that Rotterdam CPO will have a price floor of $500-$600 regardless of the level of CPO output," Fry, chairman of commodities consultancy LMC International, told Reuters by email. That CPO price includes cost, freight and insurance (CIF).

Benchmark Brent oil prices this week stood around $65 per barrel, buoyed as some producers crimp output to rein in a global glut.

Prices for Malaysian CPO delivered into Rotterdam were at $700 per tonne CIF on Wednesday. The commodity is also used to make products such as soap or chocolate. <PALM-MYCRD-P1>

"Biodiesel demand in (Malaysia and Indonesia) depends ... on the competitiveness of local palm methyl ester with diesel prices," said Fry, referring to the bio component of biodiesel that comes from palm oil.

"Only if the extra CPO output pushes down the premium of CPO over gasoil is it likely that the extra CPO production will be translated into significantly higher biodiesel demand," he added, speaking ahead of an industry event in Kula Lumpur next week.

CPO was this week trading at a nearly $80 premium over diesel, also known as gasoil. Last month saw premiums of $93, the largest in three months.

Meanwhile, the president of Malaysia's Biodiesel Association said palm-based biodiesel production remained unprofitable at current crude oil prices.

In Malaysia, biodiesel producers must follow so-called B7 production rules, meaning that biofuels must have a minimum bio content of 7 percent.

"Malaysia's biodiesel production in 2018 will be similar to 2017, unless a B10 mandate is implemented for the transport sector," U.R. Unnithan told Reuters by telephone on Tuesday.

He estimated that Malaysia produced 900,000 tonnes of biodiesel in 2017.