Palm Oil Futures Ease but Weather and Biodiesel Keep the Floor Firm

Nearby Malaysian crude palm oil (CPO) futures have paused their recent rally, with the front months on the Malaysian derivatives exchange slipping modestly, while the back of the curve stays well supported. The market is consolidating just below recent highs as traders weigh softer short‑term exports against a tightening medium‑term supply outlook driven by El Niño and strong biodiesel demand in Indonesia. Despite the small day‑to‑day losses in the prompt contracts, the overall forward curve remains steep, signalling a market that still prices in tighter fundamentals into 2027. Weather in the core palm belts of Malaysia and Indonesia is currently near seasonal norms, but a very strong El Niño is developing and is widely expected to curb yields with a time‑lag. Combined with structurally strong policy‑driven demand, particularly from Indonesia’s high biodiesel blend mandates, this underpins a constructive price bias once today’s consolidation phase runs its course.

Prices

The latest trading session on 9 September 2026 shows a mild correction at the front of the MDEX palm oil curve. September 2026 settled at MYR 4,687/t (‑1, or ‑0.02%), and October 2026 at MYR 4,773/t (‑33, or ‑0.69%). November 2026 closed at MYR 4,949/t (‑0.55%), while contracts from March 2027 onward mostly posted small gains.

This creates a still‑pronounced contango between nearby and forward positions: March 2027 settled at MYR 5,353/t and May 2027 at MYR 5,377/t, around MYR 600–700/t above the front month. Longer‑dated contracts from January 2028 onward trade in a relatively flat band just below MYR 4,940/t, but with very thin volume, highlighting that price discovery and liquidity are concentrated in the 2026–2027 strip.

*EUR approximation using a rough rate of 1 EUR ≈ 5.1 MYR.

Supply & Demand

Fundamentally, the market continues to balance a near‑term recovery in output against mounting medium‑term supply risk. Malaysian production picked up seasonally in mid‑2026, with official data showing a strong month‑on‑month increase in July output, while current harvesting and logistics are supported by broadly normal rainfall in both Malaysia and Indonesia. However, this rebound masks lagged yield damage from the developing El Niño.

Climate models and regional agencies signal a very high probability of a strong to very strong El Niño peaking between October and December 2026, with dryness in parts of Indonesia and East Malaysia already a concern. Analysts expect the main hit to fresh fruit bunch yields and average bunch size to become more visible into late 2026 and especially 2027, which aligns with academic findings that El Niño impacts on palm yields typically materialise with a 6–12 month lag. This underpins the firm pricing seen in the 2027 segment of the curve.

Fundamentals & Policy Drivers

On the demand side, the wide spread between palm oil and gasoil, combined with still‑firm crude oil prices, continues to support discretionary and mandated biodiesel use in Southeast Asia. Indonesia’s high biodiesel blending programme (B50), which came into effect in mid‑2026, is expected to absorb a substantial share of domestic CPO output, significantly tightening exportable supplies for the global market through 2027.

Food and oleochemical demand remain broadly robust, aided by ample global inventories in other vegetable oils that moderate immediate supply shock fears. Yet if El Niño trims Indonesia–Malaysia production as projected, the global palm oil balance could shift from comfortable to tighter in 2027, especially if concurrent weather issues hit northern hemisphere oilseed crops. Market positioning therefore reflects a cautious optimism: nearby contracts react to day‑to‑day export pace and macro sentiment, while forwards price in a structurally tighter S&D picture.

Weather Outlook for Key Growing Regions

Short‑term weather (next 1–2 weeks) across the main palm belts of Malaysia and Indonesia is forecast to stay close to seasonal norms in terms of rainfall and temperatures, avoiding immediate stress to harvesting operations. Nonetheless, the broader pattern is one of a rapidly strengthening El Niño with sea‑surface temperature anomalies in the Pacific climbing faster than in many past episodes.

Regional agencies warn that the cumulative effect is likely to be drier‑than‑normal conditions and heightened drought and haze risk across parts of Indonesia and Malaysia into late 2026 and 2027. For palm oil, this primarily translates into smaller bunch sizes and lower oil extraction rates with a delay, reinforcing expectations of tighter supplies next year rather than an immediate production collapse.

Trading Outlook (Next 2–4 Weeks)

• Bias: Mildly bullish medium term, but with scope for further short‑term consolidation or small correction in nearby months after the recent run‑up and modest declines in Sep–Nov 2026 contracts.
• Producers: Consider layering additional hedges or forward sales into strength in the Jan–May 2027 strip above ~EUR 1,000/t equivalent, where the curve already prices a significant weather risk premium, while keeping some upside open for a potential El Niño‑driven spike.
• Importers/Consumers: Use current dips in front‑month and early‑2027 contracts to secure coverage for Q1–Q3 2027, as fundamentals (El Niño + biodiesel demand) argue against a sustained return to significantly lower price levels.
• Speculators: The steep contango between late‑2026 and mid‑2027 offers relative‑value opportunities; long mid‑2027 versus short nearby may benefit if El Niño headlines intensify and the curve flattens.

3‑Day Directional Outlook (EUR Terms)

• MDEX front month (Sep/Oct 2026): Sideways to slightly softer in EUR/t, as the market digests slower exports and recent gains; intraday moves likely dominated by macro and crude oil.
• Q1 2027 strip (Jan–Mar 2027): Mildly firmer bias relative to front month as weather and biodiesel themes support the carry; dips likely to attract hedging demand.
• Mid‑2027 (May–Sep 2027): Stable to slightly higher; thin liquidity can exaggerate moves, but underlying narrative of lagged El Niño supply risk and strong policy‑driven demand remains supportive.