Malaysian crude palm oil futures closed higher on Monday, rebounding on renewed El Niño supply fears, with the benchmark contract trading around $1,143/MT (RM 4,613), up 0.4% from the previous session. Global benchmarks and Indonesia's reference price lag at $1,101/MT and $997/MT respectively, reflecting regional differentials and export taxes. Brent crude eased 1.1% to about $89/bbl, trimming biodiesel blending economics, while the ringgit held near 4.03 per dollar and the rupiah weakened past 17,735 per dollar.

Supply: El Niño fears intensify

The market remains caught between opposing forces. On the supply side, El Niño conditions (ONI +1.4) have brought dry weather to key growing regions — Sarawak, Sumatra/Riau and Kalimantan — raising concerns about output in the coming months. Indonesia's palm oil producer group GAPKI now predicts domestic CPO production will decline due to El Niño, reinforcing the supply-tightening narrative. The group is urging faster implementation of the smallholder replanting program (PSR, or peremajaan sawit rakyat) to address structural supply challenges and mitigate the impact of adverse weather.

Official data from MPOB for July 2026 shows Malaysian CPO production rose 9.4% month-on-month to 1,792,979 tonnes, while closing stocks climbed 7.2% to 1,429,316 tonnes — a level well above the five-year average. Exports jumped 14.5% to 1,392,178 tonnes, but imports fell sharply by 51.9% to 49,566 tonnes. The stock buildup suggests near-term supply is ample, even as forward-looking weather risks loom.

Demand: B50 and reference price

Demand-side support comes from Indonesia's B50 biodiesel mandate, which is expected to absorb more palm oil domestically, tightening export availability. This policy, combined with El Niño-driven output concerns, strengthens the case for sustained price firmness. Tight supply and robust biodiesel demand are keeping prices elevated, according to market participants. Additionally, the palm–soybean oil discount remains wide, making palm attractive for price-sensitive buyers, particularly in Asia and Africa. However, soybean oil futures fell last week after the U.S. EPA extended the RFS compliance deadline, which could soften competitive pressure on palm.

Indonesia has set its September CPO reference price at $1,007.51 per ton, a key benchmark for export levy calculations. This level, while below the Malaysian benchmark, supports the firm price outlook above MYR 4,600 and may influence levy rates, potentially affecting export competitiveness. The reference price reflects current market dynamics, including tight supply expectations.

Global palm oil prices are expected to surge on a narrow production surplus, with analysts warning of potential food inflation implications for buyers. Wheat, sugar and palm oil prices have all been rising, adding to food inflation concerns. Geopolitical disruptions to vegetable oil supply chains are adding a risk premium, though rising vegetable oil stocks in China and a weak rupiah are bearish counterweights.

Price outlook: two-sided risk

The Malaysian Palm Oil Council (MPOC) forecasts CPO prices will stay above MYR 4,600 in September amid tightening supply and geopolitical disruptions. GAPKI's production decline forecast reinforces this outlook. Our model outlook sees modest upward drift with consolidation in the $1,140–$1,180 range, but confidence is low. The anchor is four days stale, and key data such as Bursa futures positioning, cargo-surveyor export pace, and palm-specific speculative flows are unavailable. The market is balancing El Niño supply fears and biodiesel demand against a seasonal production peak and a stock overhang. The published path suggests a +2.1% gain over seven sessions, but the risk is two-sided.

What to watch

Buyers should monitor upcoming cargo-surveyor export data for August, any further El Niño updates from meteorological agencies, and the pace of Indonesia's B50 implementation and PSR progress. A break above $1,180 could signal a renewed rally, while a failure to hold $1,140 might trigger profit-taking. Also watch the rupiah — further weakness could pressure Indonesian sellers to discount.