The probability of a strong El Niño is rising sharply, a development that is refocusing attention on palm oil supply risks even as near-term inventories remain comfortable. The latest MPOB July report preview highlights this growing weather threat and asks how far off the long-awaited inventory inflection point may be. For traders and buyers, the combination of a firming weather risk premium and currently ample stocks is creating a delicate balancing act in the market.
Malaysian crude palm oil (CPO) futures were trading at about $1,109 per tonne (RM 4,539) on Wednesday, up a marginal 0.1% from the previous session. The global benchmark stood at roughly $1,101 per tonne, while Indonesia's reference price was set near $1,030 per tonne. These price levels reflect a market that is steady but cautious, with gains capped by technical resistance and a well-supplied near-term outlook.
July data: production and stocks climb
Malaysia's MPOB data for July showed CPO production rose 9.4% month-on-month to 1,792,979 tonnes, while closing stocks increased 7.2% to 1,429,316 tonnes. Exports were stronger, up 14.5% to 1,392,178 tonnes, but imports fell sharply by 51.9% to 49,566 tonnes. The fresh fruit bunch reference price edged up 1.2% to RM 49.50. The build in stocks, though expected during the peak production season, has kept a lid on bullish sentiment.
El Niño: the longer-term wildcard
The El Niño event, currently measured at ONI +1.4, is already contributing to dry conditions in key growing regions, notably Kalimantan. The rising probability of a strong El Niño adds a longer-term supply concern that could tighten inventories later in the season. While near-term peak output and ample July stocks temper immediate bullishness, the weather risk is increasingly being priced into the market's outlook.
Our model outlook points to modest further gains in CPO prices over the next seven trading days, driven by the sharp rally in Brent crude oil, which is hovering near $89 per barrel, and a wide palm-soyoil discount that encourages demand switching. However, upside is capped by technical resistance near the upper Bollinger Band at $1,116 and recent speculative long liquidation in soyoil futures. The expected path is a gently rising but choppy market, with a projected gain of 0.2% over the next seven sessions.
What to watch
Traders are monitoring the interplay between weather-driven supply risks and the current stock surplus. A stronger El Niño could accelerate the drawdown of inventories in the months ahead, potentially shifting the market from a comfortable surplus to a tighter balance. For now, the immediate data points to ample supply, but the weather risk is a factor that cannot be ignored in positioning for the coming quarters.