Palm Oil Rallies on Tightening Supply and Growing El Niño Risk

Palm oil futures have extended their recent rally, with the MDEX curve trading above MYR 4,700/t nearby and breaching MYR 5,100/t into Q1 2027, as traders price in tightening supply, strong biodiesel demand and rising El Niño risk. The structure remains modestly backwardated from Jan 2027 onward, signalling expectations of tighter balances in 2026/27 despite already elevated prices. After several range-bound months, the market has shifted decisively higher over the last week, helped by evidence of slowing Malaysian production and weather agencies flagging a high probability of a very strong El Niño into late 2026. At the same time, biodiesel mandates in key consuming countries are underpinning structural demand, partially offsetting recent softness in export data. Volatility is likely to stay elevated as the market weighs near-term demand headwinds against increasingly bullish supply expectations.

Prices

The latest MDEX palm oil futures board (21 August 2026) shows a strong, coordinated up-move across the curve:

• Sep 2026 settled at MYR 4,791/t, up MYR 57 on the day (+1.19%).
• Key benchmark Nov 2026 closed at MYR 5,018/t, +MYR 57 (+1.14%).
• Nearby Q4 2026–Q1 2027 contracts are clustered around MYR 4,900–5,150/t, all up about 0.9–1.3% on the session.
• Further-dated contracts from late 2027 into 2028/29 are quoted close to MYR 4,935/t, with very thin volumes, indicating limited hedging interest that far out.

This aligns with external benchmarks, where international crude palm oil futures have gained around 6–7% over the past week, with November contracts near USD 1,240–1,260/t and approaching prior cycle highs as supply concerns outweigh weak export numbers. turn0search1 turn0search4

*FX assumption: 1 EUR ≈ 5.2 MYR for indicative conversion only.

Supply & Demand

On the supply side, Malaysian output indicators have turned softer in August. Data from industry associations show palm oil production in Peninsular Malaysia down just over 3% month-on-month for 1–20 August, reinforcing concerns that yields are peaking earlier and may enter a weaker phase into late Q3. turn0search4

Looking ahead, authorities and analysts are increasingly focused on El Niño. MetMalaysia now sees more than a 90% probability that El Niño will reach a "very strong" or even "Super El Niño" category between October and December 2026, with impacts potentially comparable to the 1997/98 and 2015/16 events. turn0search5 While agronomists stress that yield losses typically materialise several months after prolonged heat and dryness, historical patterns suggest fresh fruit bunch yields could fall by around 10–14% in the first year of a strong El Niño episode. turn0search2 turn0search3

Demand remains underpinned by biodiesel policies. Recent analysis highlights that Malaysia and other key producers are moving towards higher blending mandates, keeping structural demand for palm oil strong even as food demand growth moderates. turn0search9 In the very short term, however, export data have been softer, and high prices could trigger some temporary demand rationing in price-sensitive markets. For now, supply-side risks clearly dominate price formation.

Weather & El Niño Outlook

Regional climate outlooks for Southeast Asia point to below- to near-normal rainfall over much of Malaysia into the second half of 2026, consistent with a developing El Niño. turn0search8 MetMalaysia and international agencies now assign a 90–97% probability to El Niño reaching strong or very strong intensity between October and December, with elevated heat and increased drought risk for key oil palm regions. turn0search5 turn0search3

Crucially for the market, agronomic research and official commentary emphasise that palm yields do not react instantly. The impact on bunch formation and oil extraction typically appears with a lag of several months after the onset of sustained hot, dry conditions. turn0search2 turn0search12 This implies that current futures prices are increasingly pricing in tighter supplies for late 2026 and 2027, rather than an immediate physical shortage.

Fundamentals & Market Structure

The MDEX curve currently shows a relatively flat to slightly backwardated structure from late 2026 into 2027. Front-month contracts (Sep–Dec 2026) trade moderately below the peak levels seen in earlier rallies but are now approaching those highs, while mid-2027 contracts are only marginally lower than Q1 2027, suggesting expectations of persistently tight balances.

External price indicators echo this constructive stance. International CPO futures and physical assessments into key import markets (e.g. India) are holding above EUR 1,100/t equivalent, supported by robust biodiesel demand and cross-commodity support from vegetable oils and energy markets. turn0search10 turn0search9 Against this backdrop, the latest weekly rally of roughly 6–7% on MDEX underlines a shift in sentiment from cautious to clearly bullish on the supply side. turn0search4

Trading Outlook (Next 1–4 Weeks)

• Bias: Moderately bullish. With the curve above MYR 4,700/t nearby and El Niño risks escalating, dips are likely to find buying interest from both trade and funds.
• Producers: Consider layering in additional hedges for Q1–Q2 2027 around the MYR 5,100–5,150/t zone, where the curve is already pricing in tightness but still below potential stress-scenario levels.
• End-users: For food and oleochemical buyers, partial forward coverage into Q4 2026–Q1 2027 appears prudent, while retaining flexibility for potential demand-side corrections if prices overshoot.
• Speculators: Momentum remains to the upside, but after a 6%+ weekly gain, be prepared for short-term pullbacks; buying on corrections towards MYR 4,600–4,700/t in front months may offer more attractive risk-reward.

3-Day Directional View (in EUR terms)

• MDEX nearby (Sep 2026): Around EUR 900–930/t equivalent. Bias: sideways to slightly higher as markets digest recent gains and watch production data.
• Q4 2026 strip (Oct–Dec): Around EUR 950–980/t. Bias: mildly higher, reflecting strong weather- and policy-driven support.
• Q1–Q2 2027 strip: Just below EUR 1,000/t. Bias: firm, with upside risk if El Niño signals strengthen further or if export demand surprises on the upside.