Palm oil stocks swell to year's high, but supply squeeze looms

Malaysia's palm oil stocks reached a yearly high in August, but industry experts anticipate a potential supply shortage next year due to a strengthening El Nino. The inventory of crude palm oil (CPO) reached 2.82 million tonnes, the highest level this year. Despite the high stock levels, the futures market shows a premium for palm oil in the early 2027 period compared to near-term prices.

Analysts predict that CPO prices will average between RM4,400 and RM4,500 a tonne this year, with some forecasts suggesting higher prices in 2027 due to El Nino's impact on production. RHB Research predicts inventories will stay above two million tonnes this year and rise further in the coming months as production peaks in Q4. CIMB Securities expects inventories to increase by 5.3% month-on-month to 2.98 million tonnes in September.

The dry conditions and low rainfall in Indonesia and Malaysia have raised concerns about future supply, with some anticipating a very strong El Nino event with a 95% probability from October to December. The global vegetable oil market may also support palm oil prices due to reduced exports from Russia and Ukraine, potentially encouraging substitution towards palm oil, especially as Indian refiners increase sunflower oil purchases between October and March.

However, Malaysian palm oil exports fell 7.5% month-on-month and 2.4% year-on-year in August, reflecting weaker demand amid elevated CPO prices. Despite higher inventories, experts maintain a generally positive outlook on CPO prices and the plantation sector, with earnings expected to improve in the third quarter due to higher CPO average selling prices and fresh fruit bunch (FFB) production.