Palm Oil Market: Seasonal Dip Before Biodiesel and El Niño Tighten Supply

Palm oil is likely nearing the end of a seasonal correction, with current weakness driven by peak Southeast Asian output and high Chinese inventories, while medium-term risks from El Niño and Indonesia’s B50 mandate tilt the balance decisively bullish. After several weeks of softer prices as Indonesia and Malaysia move through their production peak, the market is increasingly forward-looking. Weather models pointing to a high probability of El Niño and the confirmed July 1 rollout of Indonesia’s B50 biodiesel mandate suggest that today’s ample supply could give way to a significantly tighter balance into late 2026 and 2027. In the interim, elevated vegetable oil stocks in China and still-comfortable export availability are capping rallies and fostering range-bound trade.

Prices & Current Sentiment

Crude palm oil (CPO) futures on Bursa Malaysia have been trading in a choppy, sideways pattern, reflecting competing forces of seasonal supply strength and emerging policy and weather risks. Recent sessions showed mixed closes, with nearby June and July 2026 contracts fluctuating around modest gains and losses as traders react to energy price volatility and position ahead of Indonesia’s B50 start date.

Expressed in euro terms, front-month CPO values around MYR 4,470–4,535 per tonne translate to roughly EUR 850–870 per tonne, depending on the exchange rate. This pricing is consistent with a market that has corrected from earlier highs but is not pricing in a deep surplus. The tone remains cautiously constructive, with dips attracting end-user interest while rallies are curtailed by still-high inventories in key importing regions.

Supply & Demand Dynamics

Peak Output Now, Risk Later

Indonesia and Malaysia, together providing more than 80% of global palm oil output, are currently in their seasonal production peak. This upswing in fresh fruit bunch (FFB) arrivals has temporarily increased exportable supply, exerting downward pressure on international benchmarks and Chinese import parity levels. Low production costs in both countries are also reducing the urgency for aggressive export selling, further softening short-term price momentum.

However, analysts warn that this seasonal strength is unlikely to last into the second half of 2026. The expected shift toward El Niño conditions implies a higher probability of drier-than-normal weather across key palm-growing regions, which typically depresses yields with a lag of several quarters. As a result, supply risks are increasingly focused on early 2027, even though the market may begin to price them more aggressively much sooner.

China’s Inventory Buffer

China, the world’s largest palm oil importer, has built relatively high vegetable oil inventories since late April 2026, helped by stronger arrivals of soybeans, rapeseed and palm oil. These stocks, combined with subdued demand from domestic processing industries, are currently limiting import appetite and keeping local prices under pressure.

Nonetheless, industry analysts expect the downside for Chinese prices to be increasingly limited from here. As domestic demand gradually normalizes and any seasonal drawdown in stocks unfolds, China’s current buffer is likely to shrink, especially if export supplies tighten due to biodiesel demand and weather impacts. Over the medium term, this positions China to shift from being a dampener to a re-accelerator of import demand.

Fundamentals: El Niño & Biodiesel as Game Changers

El Niño Probability and Yield Risk

NOAA’s latest climate outlook signals a very high probability that El Niño conditions will emerge and persist into the Northern Hemisphere winter of 2026–27, with some projections pointing toward a strong event. For Indonesia and Malaysia, which lie squarely in the typical El Niño drought zone, this raises substantial concern about palm yields in late 2026 and especially during 2027.

Historical patterns indicate that El Niño-driven rainfall deficits reduce palm fruit yields across both countries for multiple consecutive quarters. Due to biological and agronomic lags, the heaviest production impacts usually materialize with a delay, which in this case suggests that the market may confront a tighter balance just as biodiesel-driven consumption accelerates. This time mismatch between current comfortable supply and future risk is a central bullish feature of the 6–12 month outlook.

Indonesia’s B50 Mandate and Malaysia’s Biodiesel Path

Indonesia plans to implement a nationwide B50 biodiesel blending mandate from 1 July 2026, requiring diesel fuel to contain 50% palm oil-based biodiesel. Government and industry estimates indicate that this policy could raise domestic palm oil use by roughly 3.5–4 million tonnes annually, diverting a significant share of production from export channels into the domestic fuel pool.

Malaysia is simultaneously advancing its own biodiesel roadmap, with a B15 blending mandate targeted for launch in June 2026 and an ambition to reach B50 over the longer term. While Malaysia’s immediate demand uplift will be smaller than Indonesia’s, the combined effect is a substantial structural increase in palm-based biodiesel use across Southeast Asia. This tightening on the demand side is expected to coincide with El Niño-related yield pressures, amplifying the upside risk to prices.

🌐 Broader Vegetable Oil Complex & European Exposure

Palm oil competes directly with soybean, sunflower and rapeseed oils in food manufacturing and biodiesel. Any tightening in palm oil availability tends to lift the entire vegetable oil complex, particularly when alternative oils face their own supply constraints or policy-driven demand growth. Europe remains heavily exposed via both its food and biodiesel sectors, which depend on imported palm as well as competing oils.

If Indonesian exports are curtailed by B50 and Malaysian biodiesel uptake accelerates, European buyers may be forced to increase procurement of other oils or pay higher premiums for palm. This substitution process can transmit palm market tightness into soybean oil and rapeseed oil prices, raising input costs for refiners, biodiesel producers and food manufacturers across the EU. The risk is most acute for the 2026–27 marketing year, especially if El Niño disrupts multiple oilseed crops simultaneously.

Weather Outlook for Key Regions

Short-term (next 30–60 days) weather in Indonesia and Malaysia remains generally adequate for ongoing harvest operations, allowing the current production peak to continue. However, climate models monitored by NOAA and independent research groups increasingly converge on the development of a strong to potentially “super” El Niño by late 2026, elevating the probability of pronounced dryness in Southeast Asia during the next 6–12 months.

For market participants, the key is timing: while near-term rainfall patterns may not yet show severe stress, forward-looking yield expectations for 2027 are already being revised lower in risk scenarios. Any early signs of soil moisture deficits or heat stress in major palm-growing provinces will likely trigger a faster repricing of weather risk in futures curves.

Market Outlook

30–90 Day View

• Prices are likely to remain under modest downward to sideways pressure as the seasonal production peak in Indonesia and Malaysia persists and Chinese inventories stay elevated.
• Volatility around energy markets and positioning ahead of the 1 July B50 launch will create trading ranges rather than a clear directional trend in the very short term.
• Any sign of stronger-than-expected biodiesel offtake or incremental Chinese buying could mark the end of the corrective phase and spark a quicker rebound.

6–12 Month View

• The structural outlook is bullish: El Niño-related production risk and rising biodiesel mandates in Indonesia and Malaysia are set to tighten the global balance.
• Export availability from Indonesia is expected to decline as more palm oil is absorbed domestically into fuel, with spillover tightening in competing vegetable oils.
• If El Niño proves strong and prolonged, upside price risk into 2027 becomes significant, particularly if coinciding with any other oilseed shortfalls.

Trading & Procurement Guidance

• Importers and refiners: Use current weakness to extend coverage modestly into Q4 2026, focusing on flexible contracts that allow volume adjustments if El Niño risk intensifies.
• European food and biodiesel industries: Diversify vegetable oil sourcing and consider cross-hedging with soybean and rapeseed oil futures to manage correlated upside risk.
• Producers: Hedge a portion of 2026 production to lock in margins but retain upside exposure for 2027 volumes given the asymmetric risk from El Niño and B50.
• Speculative participants: Watch for confirmation of B50 implementation and early drought signals in Indonesia/Malaysia as triggers to shift from range-trading strategies to a more directional long bias.

3‑Day Regional Price Indication (Directional, in EUR)