Malaysian crude palm oil futures held steady, with the benchmark at about $1,153/MT (RM 4,663), up 0.1% from the previous session. The market is balancing bearish fundamentals—peak Malaysian production and larger inventories—against weather-driven supply concerns and firm energy prices.

Supply: Peak Output Meets El Niño Risk

Malaysia's July MPOB data confirmed seasonal pressure: CPO output rose 9.4% month-on-month to 1,792,979 tonnes, while closing stocks climbed 7.2% to 1,429,316 tonnes. Exports were a bright spot, up 14.5% to 1,392,178 tonnes, though imports slumped 51.9%. However, August export data now shows a decline, attributed to weak demand from India, a key buyer. This softness tempers the earlier export optimism and adds to the near-term supply-demand overhang.

Weather remains the key swing factor. ENSO is in El Niño territory (ONI +1.8), with notable dryness in Kalimantan. This has fueled supply concerns across the region, supporting prices despite the near-term glut. Malaysian authorities have offered help to smallholders to mitigate El Niño impacts, while Indonesian producers are bracing for potential output losses.

Gapki projects Indonesia's 2027 palm oil output to drop 2.9%, adding to longer-term supply tightness narratives.

Demand: Biodiesel and Energy Crossover

Indonesia's biodiesel push is a major demand pillar. Full implementation of B50 is targeted for October 1, 2026, with national distribution reportedly reaching 80%. The program is projected to save Rp157 trillion in diesel imports. The government is also assessing feedstock supply for a B60 mandate in 2027, and state-linked entities are preparing to supply large volumes of palm oil for biodiesel. However, Gapki has flagged that feedstock supply remains a challenge, and experts emphasize the need for sustainable production and long-term testing to ensure B50's success.

Brent crude held near $95/bbl, keeping biodiesel blending economics broadly supportive. A wide BOPO spread (palm vs. gasoil) further underpins the incentive for biodiesel use.

Prices and Policy

Indonesia's September reference price rose 1.1% to about $1,008/MT, keeping the export levy at $148/MT. The global benchmark sits at about $1,117/MT, while the Malaysian CPO price trades at a premium.

Weak soybean oil and expectations of higher stocks pressured futures midweek, but El Niño concerns and biodiesel demand have limited downside. The ringgit held near 4.05 per dollar, a factor in export competitiveness.

Outlook

Our model outlook is balanced-to-slightly-bullish for the near term: CPO is near 52-week highs with a strong BOPO discount, El Niño concerns, and Indonesia's B50 demand providing support, but ample Malaysian stocks, peak production, and a weak rupiah create headwinds. The next MPOB release in about seven days is key event risk; the base case sees modest gains with volatility around the data. The published path shows +1.2% over seven sessions.

What to Watch

Buyers should monitor final August export data from cargo surveyors, any updates on Indonesia's B50 implementation timeline, and weather forecasts for Kalimantan. A deepening El Niño could quickly shift the balance from surplus to scarcity, while any delay in biodiesel uptake would remove a key price floor.