Palm Oil Market Faces El Niño Supply Squeeze as Biodiesel Demand Surges

El Niño-linked yield risks and Malaysia’s new B15 biodiesel mandate are setting up a tighter palm oil balance for 2026/27, supporting elevated prices in the year ahead. A combination of weather-related supply pressure and structurally stronger biofuel demand is reshaping the palm oil outlook. Malaysian production in 2026/27 is now expected to edge lower just as internal consumption rises due to higher blending mandates. At the same time, robust import needs from India and China and supportive energy markets are limiting any downside on the export side. Futures on Bursa Malaysia remain firm, with research houses and MPOB signalling that prices are likely to hold at historically elevated levels into 2027 as El Niño effects feed through to yields.

Prices

Crude palm oil (CPO) futures on Bursa Malaysia are trading around RM4,500 per tonne, equivalent to roughly EUR 880–900 per tonne at current FX (4.9 MYR/EUR). Recent sessions have been underpinned by strength in rival soybean oil and palm olein futures in China, as well as ongoing geopolitical risk that is keeping energy prices and biodiesel economics supportive.

Market consensus among Malaysian research houses has shifted away from earlier expectations of a price softening in the second half of 2026. Forecasts now mostly anticipate CPO holding above RM4,000 (about EUR 780) per tonne on average this year, with potential to peak in the first half of 2027 as El Niño-related production losses become more visible.

Supply & Demand

The USDA now pegs Malaysia’s 2026/27 palm oil production at 19.7 million tonnes, slightly below the 20.0 million tonnes expected for 2025/26. The cut reflects El Niño-linked dry weather, with the most pronounced impact on fresh fruit bunch yields expected in the third and fourth quarters due to the lagged response of oil palms to moisture stress.

On the demand side, Malaysia’s shift to mandatory B15 biodiesel in Peninsular Malaysia from 1 June 2026 is a key driver. MPOB estimates that B15 will raise annual palm oil usage by roughly 204,000 tonnes, helping push total domestic consumption to a USDA-forecast 4.59 million tonnes in 2026/27—about 330,000 tonnes higher year-on-year, largely from additional biodiesel blending.

Despite stronger local demand, exports are projected to remain robust at around 15.9 million tonnes, with India, China and Kenya staying as core buyers. This combination of slightly lower output, higher domestic use and firm exports is expected to trim Malaysia’s ending stocks from 2.8 million tonnes to 2.56 million tonnes, signalling a tighter fundamental balance for 2026/27.

Fundamentals & External Drivers

Inventory dynamics are already reflecting a gradually tighter environment. A recent survey of market participants points to Malaysian palm stocks edging up modestly in July 2026 after several months of decline, but still hovering near 2.5 million tonnes, which is consistent with the USDA’s forecast of lower carry-out in 2026/27 compared with the prior season.

Externally, several factors reinforce the supportive tone. Anticipated El Niño strengthening into late 2026 raises the probability of more pronounced yield losses in both Malaysia and Indonesia, the two dominant producers. In parallel, Indonesia’s move towards higher biodiesel blends (B50) and firm crude oil prices are expected to sustain strong consumption for palm-based biodiesel, tightening the global edible oil complex and lending further support to CPO prices.

Weather & El Niño Outlook

Meteorological agencies and market analysts warn that the ongoing El Niño could intensify, with some scenarios pointing to a potential “strong” or even “super” El Niño later in 2026. Malaysian authorities are already preparing for drier-than-normal conditions during the Southwest Monsoon, while private-sector research highlights the historical pattern of palm yield declines with a one- to four-quarter lag after peak dryness.

For plantations, the near-term implication is that July–September 2026 may mark the beginning of the stress period, but most of the production impact should materialise into 2027. This aligns with the USDA’s reduction in Malaysia’s 2026/27 output forecast and supports expectations that supply-side pressure will build over the next 6–12 months rather than ease.

Trading Outlook

• Producers / Sellers: Consider incremental forward hedging for 2026/27 at current EUR-equivalent price levels, given elevated prices and rising downside risk to yields from El Niño.
• Industrial buyers & refiners: Lock in portions of 2026/27 requirements on price dips, as structural demand from B15 in Malaysia and higher biodiesel blends regionally limits the likelihood of a major price correction.
• Speculative participants: Bias remains to the upside into early 2027; short positions should be tightly risk-managed around weather headlines and policy news on biodiesel mandates.

3-Day Directional View (EUR Terms)

• Bursa Malaysia CPO (nearby, EUR/t): Slightly bullish bias; expect prices to hold around the EUR 880–920 range, supported by strong external vegoil markets and persistent El Niño concerns.
• Rotterdam refined palm oil (EUR/t, indicative): Firm to slightly higher, tracking Malaysian futures and broader edible oil strength; any EUR appreciation versus MYR could modestly temper gains for EU buyers.