Palm Oil Under Pressure from Record Stocks, But El Niño Signals Tighter Years Ahead

Palm oil futures are retreating for a second straight session as rising Malaysian inventories and soft export demand weigh on prices, even as Brent crude trades above USD 100 per barrel and supports biodiesel-linked demand. The market is caught between heavy short‑term stocks and a structurally tighter medium‑term outlook. On the one hand, Malaysian palm oil inventories are on track to reach an all‑time high in September as production outpaces sluggish exports, pushing Bursa Malaysia’s December contract down to 4,524 ringgit per tonne. On the other hand, industry forecasts point to a decline in global palm oil output from 2027 due to El Niño‑related yield losses in Indonesia and Malaysia, suggesting that the current surplus phase could give way to a tighter balance and more volatile prices later in the decade.

Prices

The benchmark December palm oil future on Bursa Malaysia has fallen for two consecutive sessions, settling around 4,524 ringgit per tonne, a day‑on‑day loss of 0.79% and continuing the late‑September/early‑October softening trend driven by inventory concerns.

Recent trading ranges show nearby contracts consistently pressured whenever inventory headlines dominate, despite some support from firm crude oil markets that keep biodiesel economics attractive. The downside move in palm oil also mirrors weakness in rival vegetable oils such as soyoil, which have recently softened and reduced palm’s relative price advantage in the edible oil complex.

Supply & Demand

Short‑term fundamentals are clearly burdensome. Surveys ahead of the official Malaysian Palm Oil Board (MPOB) data point to September end‑stocks surpassing the previous record from December 2018, as record‑high production combines with a marked slowdown in exports. Recent estimates suggest September shipments may have fallen by around 17% month‑on‑month, reinforcing fears of a domestic stock build.

Weak import demand from key buyers such as India and China has amplified the problem, as buyers take advantage of ample global vegetable oil supplies and temporarily softer rival oils. At the same time, elevated inventories are raising the sensitivity of prices to any further export disappointments or currency strength in the ringgit, which can quickly erode Malaysia’s competitiveness in price‑sensitive markets.

Medium‑Term Fundamentals & El Niño Impact

Despite the current surplus, the medium‑term balance looks significantly tighter. Forecasts for the coming years indicate that global palm oil production could decline by at least 2 million tonnes in 2027, with analysts explicitly characterising this as a conservative estimate. The main driver is the lagged yield impact of El Niño in Indonesia and Malaysia, where hotter, drier conditions suppress fresh fruit bunch development and lower oil extraction rates with a delay of several quarters.

Malaysia’s production in 2027 is projected in a relatively narrow band of 19.2–19.3 million tonnes, implying very limited growth or even slight contraction versus recent capacity and demand trends. In combination with ongoing structural growth in food, oleochemical and biodiesel demand, this points to a much tighter global palm oil balance in 2027–2028, increasing the likelihood that today’s record stock overhang will be worked down and replaced by a risk of undersupply later in the decade.

Weather & Regional Outlook

El Niño remains the key weather variable for the palm oil market. In Southeast Asia, the phenomenon is associated with below‑average rainfall and higher temperatures, particularly across major producing regions in Indonesia and Malaysia. While short‑term field operations and near‑term output remain strong—helping to drive the 2026 stock build—the agronomic impact on palm trees is delayed, typically peaking in yield data one to two years after the main weather shock, i.e., in 2027–2028 for the current episode.

This means that, even if rainfall normalises in the near term, yield drag on fresh fruit bunch production and oil extraction is likely to persist into the forecast horizon. Market participants therefore need to distinguish clearly between today’s stock‑driven price softness and the emerging risk of structurally lower supply growth driven by weather stress on plantations.

Trading Outlook

• Short term (days to weeks): Elevated Malaysian inventories and still‑weak export data argue for continued downside or sideways‑to‑lower price action in nearby futures, with rallies likely capped until MPOB confirms that stocks have peaked or exports recover meaningfully.
• Medium term (months to 1–2 years): Once the current record stocks begin to ease, the market is poised to re‑price El Niño‑driven supply risks for 2027–2028. Any early evidence of slowing output in Indonesia or Malaysia could trigger sharper rebounds, especially if crude oil remains firm and biodiesel mandates stay intact.
• Risk management: Physical buyers may use current weakness in nearby contracts to lock in partial cover for 2027–2028, while producers should consider hedging strategies to protect downside in the near term but retain upside participation in a potential later‑cycle tightening.

3‑Day Directional Outlook (Key Exchange)

*Indicative directional view based on current inventories, export signals and related oil markets; not a guarantee of future performance.