With the price of crude oil at its current levels, retailers and manufacturers have been experiencing higher costs for raw materials and the transportation of goods. These increases are now being felt globally by the consumer. Over the past year, a wide range of commodities from aluminium to vegetable oils have experienced a high level of speculation as investors capitalise on opportunities in the commodity futures markets.

The easing back of crude oil prices since the middle of July has lessened some of the inflationary pressures on the cost of manufacturing. Crude oil prices have fallen as a result of a lower-than-expected demand due to weakening economic conditions across the G7 countries. This has coincided with a rise in OPEC production (particularly by Saudi Arabia), due to the heavy political pressure on these countries. But in reality the news that America may potentially drill for more oil led speculators to cash out and take their profits.

In recent times, vegetable oil pricing has established a link to the cost of crude oil on the back of biofuel speculation. The drop in crude oil prices and the realisation that EU biofuel targets may not be achieved have combined with adequate supply of some major oils and good prospective crops to result in some minor market crashes.

World consumption of the major vegetable oils in 2007/08 is estimated to have increased by the smallest amount in four years. The majority of the demand rationing that has caused this low rise occurred in the food sector in recent months as the scope for reducing vegetable oil usage in the biofuel sector is limited. This is due to the minimum usage levels set in place by various legislative schemes in a number of countries. Industrial use of vegetable oils has nearly tripled since the start of the decade and with rising investment in biodiesel plants across the world, industrial use of vegetable oils is expected to continue to increase in 2008/09.

World production of vegetable oils is estimated to have increased by nearly 6% in 2007/08. More than two thirds of this growth was in palm oil production and this played the most important role on the supply side in halting the price rises, especially as a number of other oils, particularly sunflower oil, have suffered falls in production. In comparison with production growth, consumption growth is estimated to have been less than 5%, resulting in an easing of the supply and demand situation. The growth in EU vegetable oil usage this season was only 0.3 million tonnes, compared with last season’s growth of 1.5 million tonnes.

Vegetable oil demand has been perceived to be under increasing pressure in recent months and as soon as oilseed harvests were confirmed to be progressing well, prices fell sharply from the late June peaks. A new appropriate price level in the market is still to be determined but the lows of the late 90s probably won’t be seen again.