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Crude palm oil (CPO) prices are projected to remain within a narrow trading range in the near term before embarking on an upward trajectory in the first half of 2027, as the onset of El Nino begins to impact production and stock levels moderate.
RHB Research noted that El Nino has been confirmed by the majority of weather models, with expectations that the phenomenon will be very strong and persist until the first quarter of 2027. While the full impact on palm oil yields has yet to materialize, ramifications are anticipated to surface starting in the first quarter of next year, aligning with the traditional low cropping season.
According to the research firm, once inventory levels begin to decline from their current highs, CPO prices are likely to trend higher in the first half of next year. Consequently, RHB Research has maintained its CPO price assumptions for 2026 and 2027 at RM4,400 and RM4,500 per tonne, respectively.
In the immediate term, prices are expected to stay rangebound due to the peak production cycle and elevated stocks. Spot prices have displayed volatility amid geopolitical tensions, though the correlation between CPO and crude oil has softened to approximately 0.59 times, down from a peak of 0.91 times in the second quarter. This suggests that Middle East developments are currently exerting less influence on CPO pricing than initially observed, mirroring the market behavior seen during the early stages of the Russia-Ukraine conflict.
Market dynamics are also being shaped by the palm oil-gas oil (POGO) spread, which has moved to a positive US$19 per barrel as crude oil price gains outpace CPO. This positive spread could incentivize Indonesia to increase its biodiesel mandate to B60 by 2027. Such a move would effectively remove an additional five to six million tonnes of palm oil from the global export market, further driving scarcity premiums. Additionally, discretionary biodiesel demand of three million tonnes per annum could return if the spread remains favorable.
On the demand side, a recovery is expected from late September following India's decision to slash import duties on CPO from 10% to 5% and on refined palm oil from 32.5% to 27.5%. However, supply risks remain in Indonesia due to the proposed Agrarian Reform Law, which may require planters to redistribute 20% of their land or make profit-based payments. If implemented, the law could stifle productivity and further tighten global availability.
RHB Research maintains an 'Overweight' call on the plantation sector, suggesting that recent price pullbacks offer buying opportunities, specifically for players with lower exposure to Indonesian regulatory risks.
Source: KLSE Screener