Palm Oil Slides on Inventory Worries While El Niño Keeps 2027 in Focus

Palm oil futures are extending their correction as Malaysian contracts lost around 2% on Friday and hit the lowest levels since early August, pressured by expectations of rising stocks above 3.1 million tonnes and subdued import demand from India. Medium‑term, however, El Niño‑related yield risks for 2027 in Indonesia and Malaysia cap structural downside. After a brief recovery phase, the palm oil market has turned clearly softer again. Active MDEX contracts from October 2026 through mid‑2027 fell by 1.5–2.4% on 25 September, mirroring a week‑on‑week loss of about 4.6% and marking the weakest levels since 3 August. The main drivers are an anticipated seasonal output increase in Southeast Asia, weaker exports, and lower crude oil prices, which reduce biodiesel demand incentives. At the same time, speculative length in the wider oilseed complex remains focused on soymeal rather than vegetable oils, limiting cross‑support for palm oil.

Prices

Palm oil futures on the Malaysian derivatives exchange declined sharply on Friday, with the nearby October 2026 contract settling at 4,475 MYR/t, down 89 MYR or 1.99% on the day. The forward curve from November 2026 to May 2027 showed similar declines of 1.6–2.4%, with the benchmark December 2026 contract closing at 4,672 MYR/t. Along the curve, prices rise modestly into early 2027, with January 2027 at 4,768 MYR/t and March 2027 at 4,941 MYR/t, but the backwardation versus earlier recent highs has narrowed significantly. This confirms a market that is still relatively tight in the very long term but currently well supplied and increasingly comfortable with near‑term availability. On a weekly basis, palm oil has lost about 4.6% after gaining 1.7% the week before, indicating a clear shift in sentiment towards a more bearish short‑term outlook. Daily data from Bursa Malaysia and other exchanges show that third‑month FCPO prices have eased steadily since mid‑September but remain within the 12‑month trading range, suggesting a correction rather than a structural breakdown.

Supply & Demand

The dominant near‑term factor is the expectation of higher Malaysian production and stocks. Market participants anticipate end‑September inventories exceeding 3.1 million tonnes, up from already elevated levels, as seasonal output rises while exports lag. This is consistent with local reports that CPO futures closed lower on 25 September amid mounting stock concerns. Export demand remains underwhelming, particularly from India, the world’s largest palm oil importer. Despite reductions in import tariffs on palm, soybean and sunflower oil, Indian buyers have not significantly increased purchases. Weak domestic demand and comfortable vegetable oil stocks, together with competition from discounted sunflower and soybean oil, have kept interest in palm oil subdued. In the biodiesel segment, falling crude oil prices have eroded the attractiveness of palm‑based biodiesel blending, especially in Indonesia and Malaysia. When energy prices retreat, discretionary blending economics deteriorate, which in turn reduces industrial demand for palm oil and reinforces the oversupply narrative. Meanwhile, in the broader oilseed complex, Chinese and global demand for soybeans remains firm, but the benefit is largely accruing to soymeal rather than vegoils.

Fundamentals & External Drivers

Speculative flows currently favor soymeal over palm and other vegetable oils. Recent CFTC data show that managed money has expanded long positions in the soy complex, particularly soymeal, while sentiment toward soyoil and palm oil is more cautious. This rotation reflects expectations of robust feed demand and relatively less bullish views on biodiesel and food oil use. Within the soy complex, soyoil posted a mild technical rebound after hitting a four‑week low, but soymeal eased from a recent four‑week high. Even so, the multi‑week trend has clearly favored meal, leaving palm oil without strong cross‑support from rival vegoils. At the same time, a firmer ringgit at times has weighed on export competitiveness, although currency effects are secondary to stock and demand fundamentals. Macro‑financial conditions are mixed for palm oil. Crude oil has softened recently, undermining biofuel margins, while broader commodity indices show less risk‑on appetite than earlier in the year. However, geopolitical risks that had previously underpinned energy and vegoil prices remain in the background and could re‑emerge as a supportive factor if they escalate.

Weather & El Niño Outlook

The medium‑term focus is increasingly on El Niño’s lagged effect on palm yields. Analysts expect that ongoing dryness will translate into lower fresh fruit bunch (FFB) output with a delay, implying a roughly 3% production decline in 2027 for Indonesia and Malaysia combined. Current projections suggest Indonesian palm oil production could fall to about 49 million tonnes in 2027, while Malaysia’s output may drop to around 19.5 million tonnes. Notably, the Indonesian palm oil association has recently revised its expected production decline from 5% to 3%, indicating that earlier fears have moderated but not disappeared. Because these weather‑driven yield impacts materialize with a significant lag, the market remains well supplied in the near term. As a result, the 2027 risk premium is not yet fully reflected in current prices, and nearby contracts continue to trade more on inventory and demand signals than on forward supply fears.

Outlook & Trading Ideas

• Near term (next 1–4 weeks): With Malaysian stocks likely above 3.1 million tonnes and export demand from India weak, price risks for nearby contracts remain skewed to the downside or sideways. Any additional weakness in crude oil would further pressure biodiesel‑linked demand.
• Medium term (Q4 2026–H1 2027): Seasonal production should peak and then ease, which, combined with potential policy support for biodiesel mandates and any rebound in Indian or Chinese buying, could help establish a price floor. El Niño concerns may start to feature more prominently if crop surveys confirm stressed yields.
• Longer term (2027): A projected 3% output decline in Indonesia and Malaysia, if realized, would tighten the global balance and likely shift the curve back into stronger backwardation, supporting deferred contracts relative to nearby months.

Indicative 3‑Day Directional View (Key Exchanges)

• MDEX (FCPO, Malaysia): Slightly bearish/sideways bias as the market digests high stock expectations and recent losses, with potential consolidation after the latest 2% daily drop.
• CME USD‑denominated CPO: Mildly softer in sympathy with MDEX, though USD and ringgit moves may cause short‑term noise rather than altering the fundamental trend.
• Related vegoils (soyoil, sunflower oil): Neutral to slightly supportive; any renewed strength could slow but likely not fully reverse current palm oil weakness in the very near term.