Malaysia’s palm oil surge: What’s driving prices to biggest highs since 2022?

Palm oil prices in Malaysia surged to their highest levels since July 2022, with Bursa Malaysia’s third-month crude palm oil futures closing at RM4,486 per tonne on Wednesday (October 23).

According to analysis by BMI, this marks a 22.6 per cent increase for the year to date and a 19.5 per cent gain compared to the same period in 2023.

In October alone, prices rose 12 per cent, driven by supply concerns, exchange rate movements, and price increases in related edible oils, the Fitch Solutions company added.

One of the key factors behind the price rally is the supply shortfall from Indonesia, the world’s largest palm oil producer.

In September 2024, Indonesian exports dropped to 1.79 million tonnes, down from 2.38 million tonnes in August and 2.28 million tonnes a year earlier.

This decline in exports has been linked to the impact of the 2023-2024 El Niño, which affected palm fruit yields, and a reduction in domestic production, as highlighted by the Indonesian Palm Oil Association (GAPKI).

In the first eight months of 2024, Indonesia’s production fell to 34.52 million tonnes from 36.29 million tonnes in the same period in 2023.

Indonesia’s plans to implement a B40 biodiesel mandate in 2025 have further tightened supply expectations.

The shift from the current B35 mandate could divert an additional 1.5-1.7 million tonnes of palm oil from the export market annually, exacerbating supply pressures.

Moreover, a potential B50 mandate, though less likely in early 2025 due to performance testing and infrastructure needs, remains an upside risk to prices in the coming year.

In Malaysia, palm oil exports have been relatively robust in 2024, with 12.30 million tonnes shipped between January and September, compared to 10.88 million tonnes in the same period in 2023.

However, stocks are tightening, with inventories falling to 1.06 million tonnes in September 2024, down from 1.37 million tonnes a year earlier, according to the Malaysian Palm Oil Board (MPOB).

Additional upward pressure on prices has come from the depreciation of the Malaysian ringgit.

Between October 1 and 22, the ringgit fell 4.2 per cent against the US dollar, increasing foreign demand for ringgit-denominated palm oil contracts.

The FAO Vegetable Oils Price Index (FVOPI) also gained 4.6 per cent month-on-month in September, hitting a 21-month high.

Palm oil’s price increases, alongside soy, sunflower, and rapeseed oils, were driven by tightening supply outlooks in the US and Europe.

Geopolitical tensions, particularly in the Middle East, have also contributed to price volatility.

Rising risk premia in the oil market, following escalations in the region, have bolstered demand for biofuel feedstocks such as palm oil.

Crude oil prices saw a 10 per cent rise in early October, adding to the bullish sentiment in the palm oil market.

Despite these factors, BMI maintains that the drivers of this price strength are largely short-term.

The impact of El Niño on Indonesian production is expected to fade as weather conditions normalise.

Furthermore, the anticipated La Niña in Q4 2024, while potentially reducing the risk of flooding from heavy rainfall, poses limited long-term threats to palm oil output.

Palm oil import demand is also expected to ease in Q4 2024, particularly from India, where tariffs on crude and refined edible oils have recently been raised.

Looking ahead, BMI forecasts an average palm oil price of RM3,850 per tonne for 2024, down from the current year-to-date average of RM3,966 per tonne.

For 2025, the firm projects a price of RM3,650 per tonne.

However, it cautioned that several upside risks remain, including the possibility of weaker production in Indonesia and Malaysia, an earlier-than-expected rollout of Indonesia’s biodiesel mandates, reductions in India’s edible oil tariffs, and sustained geopolitical instability in the Middle East.

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Tags: prices, Crude palm oil, Production, Malaysia, biodiesel, palm oil, futures, exports, Indonesia