By Niluksi Koswanage and Naveen Thukral

KUALA LUMPUR/SINGAPORE, Aug 18 (Reuters) - European
consumers will be forced to boost shipments of palm oil,
despite a vigorous campaign by green groups against it, after a
drought that shrivelled oilseed crops across the Black Sea
region.

Palm oil futures on the Bursa Malaysia Derivatives Exchange
climbed to a 15-month top last week and the market could be set
for further gains as European consumers scurry for supplies to
satisfy demand from the food and fuel sectors.
A storm could be brewing in global vegetable oil markets,
analysts say, although not on the scale seen in U.S. wheat
futures, which surged to two-year highs this month.

"Europe's rapeseed crop was lower than expected and Ukraine
is going to have a very limited supply available for exports,"
said Doug Whitehead, a commodities analyst at Rabobank in
London.

"It really means that rapeseed oil supplies will be very
much constrained, so it is likely we will see palm oil moving
as a substitute."

Hamburg-based analysts OilWorld forecast the European
Union's palm oil demand to rise 4.4 percent to 5.7 million
tonnes in the oil marketing year to September 2010, making the
region the No.3 buyer after India and China.

That coincides with expectations for the European Union's
rapeseed crop to fall 7.8 percent to 19.9 million tonnes in
2010 from a year ago while Ukraine's sunflower crop may drop
2.7 percent to 7.1 million tonnes, OilWorld data showed.

Excessive rains are likely to cut canola production in
Canada, reducing exports nearly 20 percent to 6 million tonnes.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For a Q+A on impact of La Nina on palm oil click

For a graphic on European Union demand vs major buyers
click:

http://graphics.thomsonreuters.com/ce/EU_PLMDMD0810.gif

For a factbox on top European palm oil buyers, click

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

TRADERS BRACE FOR DEALS

Data from cargo surveyors shows that demand for Malaysian
palm oil from the region has outpaced India and China so far in
August, and traders expect more.

"We expect to see some new orders coming in this week
onwards to about September or October," said a trader with a
Singapore-listed planter who deals with European buyers.

"Inquiries are there and sentiment is positive. European
customers will buy on small dips in the current palm oil rally.
They don't want to be caught off guard."

In the Rotterdam cash market, palm oil was up 11 percent in
August, while its discount to rapeseed oil has widened to more
than $175 a tonne from an average of $75 in the second quarter,
making palm oil a cheaper substitute.

"The law of economics will pull the cheapest oil into the
European food market and palm oil's widening discount to
rapeseed makes that happen," said Dorab Mistry, head of trading
for Indian firm Godrej's international arm.

European buyers may have to push environment issues linked
to palm oil on the back burner as they struggle with lower
domestic supplies, although top importers will be unwilling to
take shipments from firms accused of destroying rainforests to
expand palm estates.

"For major consumers like Germany sustainability is
important, but we are going to see increased flows of palm oil
as there are not enough edible oil sources," said Standard
Chartered analyst Abah Ofon.

"We continue to be bullish on palm oil as we feel global
consumption of edible oils is going to outstrip supplies in the
coming year."

Environmentalists say palm oil's use in biofuels has
triggered a land grab at the expense of rainforests and
peatlands -- a campaign that largely limited its use in the
sector.

Rapeseed oil is mostly channeled to biofuels, leaving palm
oil for the food sector and green groups have persuaded
Unilever and Nestle to scrap supply contracts with some
planters.

Some traders say European firms may import more soyoil to
avoid a backlash from environment-conscious consumers while a
more compelling reason points to prospects of bumper soy crops
from the Americas.

"Even if soyoil is taken up rather than palm oil, there
will be a ripple effect as soyoil will come up short," said
Kuala Lumpur-based Citi analyst Penny Yaw.

"Countries that usually import soyoil will then have to
rely on palm oil. Somehow, palm oil will benefit," said the
analyst, referring to India, which shifted some demand to
soyoil in early 2010 when palm oil rallied on hot weather
hurting output.

Palm oil production will also be affected by changes in
global weather. Prices have also risen on the back of the
brewing La Nina-driven rains that may disrupt harvesting in the
world's top producers Indonesia and Malaysia in the short term
but could boost output in 2011 and staunch the European oilseed
decline.

The Indonesian Palm Oil Association said crude palm oil
output may grow at a slower pace of 4.5-5.0 percent this year
as prolonged rains hit yields. Malaysia's commodities ministry
has revised its palm oil output forecast this year to 17.8
million tonnes from 18.1 million on prospects of wetter
weather.
(Editing by Clarence Fernandez)