Global palm oil production is expected to increase by 3.6% year-on-year (y-o-y) to 80 million tonnes (mt) during the November-October 2023-24 season, according to research agency BMI. However, the warm ocean water phenomenon El Nino poses a risk to the output. The US Department of Agriculture (USDA) also predicts a 2.4% YoY increase in palm oil production to 79.46 mt in the upcoming season.
Water stress in Malaysia
Abdul Hameed, Director-Sales at Manzoor Trading Pakistan, has stated that water stress in Malaysia is currently affecting palm oil yield, which could impact production in August. Malaysian states like Sabah and Sarawak are witnessing a drop in production. BMI forecasts that palm oil production growth in both Indonesia and Malaysia will be close to the trend, depending on the strength of El Nino. The US weather agency, National Oceanic and Atmospheric Administration’s Climate Prediction Centre, estimates a 20% chance of El Nino developing into a strong event, as seen during 2014-16.
Rise in consumption
BMI projects that global palm oil consumption will increase by 3.7% y-o-y to 78.9 mt in 2023-24. The USDA expects the offtake to reach 77.51 mt compared to 74.73 mt in the current season. The rising demand for palm oil is attributed to weather conditions in Asia and its affordability compared to other oils in the region. India, which imported 1 mt in July, continues to actively purchase palm oil. The USDA predicts slightly lower palm oil ending stocks at 16.67 mt for the upcoming season.
Upside risk
BMI believes that the current El Nino event poses an upside risk to its average palm oil price outlook over the next 12-18 months. The strength of the El Nino event will significantly impact palm oil prices. During the 2014-16 El Nino, below-average moisture levels led to an increase in palm oil prices in Indonesia and Malaysia. BMI forecasts the third-month futures of crude palm oil to average at 3,800 Malaysian ringgits (MYR) in 2023, while 2024 average palm oil prices are expected to be around 3,400 MYR. In the near-term, palm oil prices are predicted to range between 3,800 and 4,500 MYR. Currently, the Malaysian crude palm oil November contract is quoted at 3,869 MYR on the Bursa Malaysia Derivatives Exchange.