Malaysian Palm Oil Industry Fundamental Data Signals a Change to Bullish Market Tones

Recently published Malaysia palm oil industry performance data is signaling a change from the bearish sentiments that have clouded the palm oil market since January 2023. Amid lower prices of rival oils, Malaysia's palm oil production and stocks were higher YoY in the first quarter of the year, keeping palm oil and product prices low. Consequently, monthly export prices of processed palm oil products for the first quarter were all accessed below 2022 prices. Relatedly, the crude palm oil CIF Rotterdam has also, so far, traded well below the highs in 2022.

However, that underlying picture is primed to change to a rather tight palm oil market. Heavy rains and flooding in important palm-growing areas in March and towards the end of April have triggered delays and disruptions to palm crop harvesting and transporting. Effects from extreme weather issues and harvesting delays due to the Ramadan holidays have begun to be seen in palm production numbers. Crude palm oil production fell by 91 thousand mt to 1.19 million mt in April, a 7% MoM decrease: this is not only the lowest production recorded since February 2022 but the lowest recorded crude palm oil production output in April for the last 12 years.

Inventories also showed similar bullish signals: total palm oil stocks, made up of crude palm oil and processed palm oil, came in 10.5% lower at 1.49 million mt, and the lowest April stocks since 2013. Palm oil exports from Malaysia, the world's second-largest palm oil producer and exporter, fell by 28% from 1.48 million mt in March to 1.07 million in April. Although that drop is significant, it's well around market expectations, with export in April 2022 being 1.06 million mt.

In addition, the risk of an El Niño phenomenon in the second half of the year could affect palm production and add to the bullish market undertones. So far, El Niño indicator thresholds are likely to be approached or exceeded, resulting in below-average rainfall in southeast Asia, helping cut yields and pushing global prices up.

Although production going into the second half is expected to edge up in line with the seasonal trend of higher production, the certainty of that lies in the balance owing to the bullish El Niño indicators. Even if production increases, the gains may be marginal.

On the other hand, if the current lower demand for palm continues, it would help reduce the expected upside risk in the palm oil market, given the low prices of other edible oils, particularly sunflower. However, failure to extend the Black Sea grain agreement between Ukraine and Russia would push demand for sunflower into palm oil, adding to the base risk in the market as they all compete for a share in the global vegetable oil mix. The picture in the short term is thus looking to crossover from bearish to mildly bullish.