Palm Oil Futures Drift Lower While El Niño Risks Build in the Background

Nearby palm oil futures on the MDEX are edging slightly lower in a tight range, but strengthening El Niño signals and restrictive Indonesian export policies point to a more supportive price environment into late 2026 and 2027. The palm oil market is currently in a consolidation phase. Most active MDEX contracts between July 2026 and May 2027 are trading around MYR 4,500–4,650 per tonne with small daily losses of 0.1–0.3%, reflecting modest long liquidation and softer related markets. At the same time, research houses highlight rising El Niño probabilities and firmer biofuel-driven demand for vegetable oils, suggesting downside in palm oil may be limited. Traders are increasingly focused on second-half 2026 weather in Indonesia and Malaysia, Indonesian export policy, and the trajectory of crude and soybean oil prices as the key catalysts for the next directional move.

Prices

The MDEX forward curve on 30 June 2026 shows a gently upward-sloping structure from nearby July 2026 to early 2027, before flattening for longer-dated contracts:

Benchmark Bursa Malaysia CPO futures have been trading broadly in line with this range. Recent closes around MYR 4,500 per tonne leave prices near key research houses’ 2026 average assumptions of about MYR 4,400 per tonne, signaling a fairly valued market in the short term.

Converted to EUR (using ~MYR 5.0/EUR for illustration), current MDEX prices imply a nearby equivalent of roughly EUR 900–940 per tonne for crude palm oil, competitive versus other vegetable oils, particularly when global biofuel mandates and tight feedstock availability are considered.

Supply & Demand

On the supply side, Indonesia and Malaysia remain the dominant producers, and both are entering a period of elevated weather risk. Forecasts from regional and international agencies now point to a strong likelihood of El Niño developing from mid-2026, historically associated with palm yield declines of 2–20% with a typical one-year lag.

Indonesian export controls and stricter domestic market obligations continue to tighten effective export availability, redirecting some demand flows to Malaysian origin and keeping a floor under prices even in the absence of immediate supply shocks. Research notes that El Niño, when combined with Indonesian policy, could materially tighten global palm oil balances heading into 2027 if dryness proves severe.

Demand remains underpinned by the biodiesel and renewable fuel sectors, where structural feedstock deficits in key markets support palm oil use alongside competing oils. Stronger crude oil prices earlier in the year and resilient diesel demand have enhanced the economics of biofuel blending, while relatively ample global stocks of grains and other food crops currently mitigate broader food security concerns, reducing political pressure for restrictive policies on palm oil use.

Fundamentals & Weather

Fundamentally, near-term palm oil production in Southeast Asia has been adequate, with some individual producers reporting lower fresh fruit bunch and CPO output due to replanting and localized yield issues. However, at an aggregate level, expectations are still for modest year-on-year output growth in 2026, with the main uncertainty concentrated in 2027 if El Niño-driven moisture deficits intensify.

Meteorological outlooks for Malaysia and the broader ASEAN region highlight an increasing probability of below-normal rainfall from July onward, consistent with emerging El Niño and a possible positive Indian Ocean Dipole phase. That pattern typically brings drier-than-average conditions to key oil palm belts in Sumatra, Kalimantan and Peninsular Malaysia, with impacts on bunch formation often showing up with a lag of several months.

In the short term (next 4–6 weeks), most forecasts still show some rainfall over main estates, meaning no immediate, sharp production shock is expected. Yet the risk skew is clearly to tighter supplies and lower stocks into 2027 if dryness persists, aligning with bullish medium-term price projections from several banks and brokers.

Outlook & Trading Recommendations

• Price bias: With MDEX futures clustered near MYR 4,500–4,650 per tonne and modest daily declines, the near-term bias is sideways to mildly softer, but downside appears limited by weather and policy risks.
• Producers: Consider layering in hedges for Q4 2026–H1 2027 sales on rallies above the current curve, securing margins before any El Niño-induced tightening materializes more clearly.
• Consumers: For refiners and large buyers, staggered coverage for H2 2026 remains prudent; using current small dips in nearby contracts to lift coverage toward average levels can mitigate upside risk from potential supply disruptions.
• Investors: The gently upward-sloping curve offers opportunities for calendar spreads favoring later 2026/early 2027, particularly if El Niño expectations strengthen and Indonesian export restrictions persist.

3-Day Directional View (EUR-based)

• MDEX front-month CPO (Malaysia): Slightly softer to range-bound over the next three sessions, roughly equivalent to EUR 890–940/t, tracking crude and soybean oil volatility.
• Deferred MDEX (Q1–Q2 2027): Stable to mildly firm versus nearby as weather risk premium remains embedded.
• EU FOB refined palm olein: Expected to mirror MDEX moves with stable differentials; minor day-to-day fluctuations mainly driven by FX and freight rather than fundamentals.