Palm oil advanced on speculation that a decline in the previous two days was overdone, and amid forecasts that a La Nina event that caused drought in South America and flooding in Asia may last longer than expected.

April-delivery futures rose 0.4 percent to 3,685 ringgit ($1,208) a metric ton at the close in Kuala Lumpur. Prices fell 2.2 percent in the previous two days.

Palm oil has rallied 48 percent in the past six months on concern that cooking-oil supplies may tighten as dry weather in Argentina withered crops in the largest soybean-oil producer and rainfall hindered oil-palm harvests in Indonesia and Malaysia, the top producers. Soybean and palm oils are direct substitutes in food and fuel applications.

Palm oil “prices recovered after the knee-jerk reaction to news of rainfall” over parts of South America, Hoe Lee Leng, an analyst at RHB Research Institute Sdn., said by phone today.

La Nina may persist through August, Commodity Weather Group LLC said Jan. 24. The weather event can bring drier-than-usual conditions to parts of Latin America, including the soybean- and corn-growing areas in Argentina and Brazil, and excessive rain to Southeast Asia.

“There remains some upside price risk should the La Nina effect persist beyond the seasonally weak production months of January and February,” Barclays Capital analysts including Xin Yi Chen, Yingxi Yu and Sudakshina Unnikrishnan, said yesterday in an e-mailed report to clients. “Formation of fresh-fruit bunches would also be affected, while high water content could lower the oil-extraction rate.”

Record Prices

Palm oil is likely to rally as demand tops output for the first time in two decades, the analysts said. Supply constraints will last at least until the end of the first half of this year and average prices may reach a record in the 2010-2011 marketing year, they said.

“We expect continued growth in Chinese and Indian demand, along with recovery in demand in EU countries, to more than offset any switch in demand away from palm oil as a result of higher prices,” the analysts said.

Today’s gain “marks the end of some profit-taking by traders,” Arhnue Tan, an analyst at ECM Libra Capital Sdn., said in an e-mail. “Technically, there has not been much news to suggest that prices should cool in the near term.”

Soybeans for March-delivery lost 0.3 percent to $13.82 a bushel at 6:05 p.m. Soybean oil traded little changed at 56.62 cents a pound.

Palm oil for September delivery on the Dalian Commodity Exchange rose 0.9 percent to close at 9,674 yuan ($1,468) a ton. Soybean oil for delivery in the same month climbed 0.8 percent to 10,400 yuan a ton at the close.

CME Group Inc.’s April palm oil contract, pegged to the Malaysian benchmark price, fell 1.1 percent to $1,203.25 a ton at 4:23 p.m. in Singapore.