25/08/2026 (The Edge Malaysia) - CRUDE palm oil (CPO) prices are holding firm, despite rising Malaysian inventories, as the market looks beyond near-term supply to the risk of tighter conditions in 2027. Strengthening El Niño conditions, Indonesia’s B50 biodiesel mandate and disruptions to competing vegetable oils have prompted analysts to raise their price forecasts.

The key commodity has gained more than 15% since the start of the year, while Malaysia’s average CPO price stood at RM4,493 per tonne last month, up 9.3% year on year. For the first seven months of 2026, CPO averaged at RM4,388 per tonne.

Some industry players see further upside. SD Guthrie (KL:SDG), one of the world’s largest palm oil producers, said at its results briefing last Tuesday that it expected CPO to trade between RM4,600 and RM5,000 per tonne for the rest of the year, and reach as high as RM5,200 per tonne in the first quarter of 2027 if El Niño conditions develop.

“Earlier on, the market was trading on expectations [of the El Niño effects on crops] and, now, the market is seeing some actual signs. Many parties agree that CPO prices will be higher, especially with production potentially being lower going into 2027,” CIMB Securities head of Malaysia research and regional plantation analyst Ivy Ng Lee Fang tells The Edge.

“It is not possible to [estimate] what the year-end inventory will look like, as we wouldn’t know the extent of the drought then and its impact on supply. Nevertheless, everyone is bracing for a more severe impact because the Meteorological Department has said the El Niño signs are [worsening],” she says, adding that the weather phenomenon has had a greater impact on Indonesia than Malaysia.

Bracing for a worsening El Niño

According to the Asean Specialised Meteorological Centre, Indonesia’s hotspot activity picked up notably in August 2026, driven by a sharp increase in Kalimantan, where hotspot counts rose 159% month on month (m-o-m) to 3,462, accounting for about 60% of Kalimantan’s year-to-date total of 5,825. Hotspot counts refer to satellite-detected heat anomalies, commonly used as an indicator of possible vegetation or peat fires.

“A forest fire was also reported on Aug 3 in East Java province, affecting 550ha, which we believe is indicative of increasingly dry conditions across parts of Indonesia. While current hotspot levels remain well below those recorded during El Niño years, such as in 2015 and 2019, the pace of increase is notable. A prolonged dry spell in Indonesia, in our view, could also elevate haze risk in Malaysia, potentially disrupting harvesting activities,” CGS International said in an Aug 11 note.

According to several analysts, channel checks indicate that most Malaysian estates continue to receive sufficient rainfall for now.

For context, past El Niño events in 2015 and 2022 indeed led to higher CPO prices as production lagged. During the 2015/16 El Niño period, CPO prices rose about 21.5%, while Malaysia’s CPO output subsequently fell to 17.32 million tonnes in 2016 from 19.96 million tonnes in 2015, Malaysian Palm Oil Board (MPOB) records show.

CIMB has raised its average CPO price forecast for 2026 and 2027 by RM50 per tonne to RM4,450 and RM4,550 respectively, citing geopolitical risks, strengthening El Niño weather conditions and higher Indonesian biodiesel demand.

PhillipCapital Research, which is “neutral” on the plantation sector, expects CPO to trade between RM4,400 and RM4,600 in August and September, with its full-year assumption of RM4,350 per tonne for 2026 and RM4,400 for 2027. Nevertheless, it expects Malaysian inventories to remain elevated at between 2.5 million and 2.8 million tonnes over the coming months as the industry moves through its seasonal peak production period.

Meanwhile, TA Securities, which is maintaining its 2026 price assumption at RM4,300 per tonne, cautioned in an Aug 12 note that high inventories could cause prices to moderate in the second half of this year, although it did not expect a sharp correction.

According to MPOB’s monthly statistics report published on Aug 10, inventories rose 3.3% m-o-m to 2.63 million tonnes in July, the highest in five months and up 24% y-o-y, as production rose 9.4% to 1.79 million tonnes from June. Exports increased 14.5% to 1.39 million tonnes.

Even so, several factors have kept CPO prices firm despite the stock build. Demand has remained resilient, while palm oil has become increasingly competitive against rival vegetable oils.

India, the world’s largest vegetable oil importer, stepped up purchases in July, with palm oil imports surging 50% m-o-m to about 733,000 tonnes, the highest in five months, as refiners stocked up ahead of the nation’s broad festive season from August to November.

“El Niño is forecast to strengthen, with the NOAA (National Oceanic and Atmospheric Administration) estimating an 81% probability of a very strong El Niño during October to December 2026. Stronger El Niño weather conditions could reduce oil palm yields and production in Southeast Asia with a time lag, posing greater downside risk to supply from 2027 onwards,” says CIMB’s Ng.

The weather phenomenon is expected to bring hotter and drier conditions to Southeast Asia. But the impact on oil palm is unusual in that drought does not necessarily translate immediately into lower production. Stress on palms can affect fruit formation, meaning the largest yield impact can emerge more than a year after the weather event.

“The US Department of Agriculture has cut its Indonesian palm oil production forecast for 2026/27 to 47.2 million tonnes amid expectations of drought conditions,” Ng points out.

In addition, higher crude oil prices have supported CPO by making palm-based biodiesel more economically attractive, boosting demand from Indonesia.

Impact of Indonesia’s B50 mandate on supply

Indonesia implemented the B50 biodiesel mandate on July 1, raising palm-based biodiesel content in diesel to 50% from 40%. The rollout was shelved in January over technical and funding concerns, but President Prabowo Subianto revived the plan in March amid heightened concerns about energy security.

B50 is significant because it increases Indonesia’s domestic palm oil demand, potentially reducing exportable supply. Analysts have pointed out that any tightening of exports by Indonesia, the world’s largest producer, could support CPO prices and Malaysian planters’ earnings.

“Indonesia’s nationwide B50 biodiesel mandate is expected to consume 16.7 million to 18 million kilolitres of palm biodiesel annually, providing additional support to palm oil demand. However, relatively high Malaysian palm oil inventories and CPO’s price premium over competing vegetable oils could cap near-term price upside,” says CIMB’s Ng.

Notably, an Aug 7 Reuters report said palm oil harvesting in parts of Borneo and Sumatra was being disrupted by sharply higher diesel costs and fuel shortages, causing some smallholders to reduce harvesting and fruit collection.

“It is hard to say how big an impact this could be. It could have just a localised effect, affecting only a small group of planters,” says Ng.

Geopolitics has added another layer to the CPO rally. An escalation in attacks on ships, ports and export infrastructure around the Black Sea has disrupted commodity flows from the region.

That matters to palm oil because Russia and Ukraine are dominant suppliers of sunflower oil. Disruptions to sunflower oil exports can push importing countries towards alternatives such as palm and soybean oil, supporting prices across the vegetable oil complex. The same substitution effect was seen after Russia’s initial invasion of Ukraine in 2022.

“Sunflower oil exports from Russia and Ukraine fell sharply in late July [following an escalation of tensions between the two countries] and are expected to remain very low in August, after intensified attacks on ports, infrastructure and commercial vessels prompted several major players to suspend operations and export offers. This could support substitution demand for palm oil ahead of India’s festival season from September to November,” CIMB said in its Aug 11 sectoral note.

Analysts favour upstream exposure

The prospect of firmer CPO prices has kept several research houses positive on plantation stocks, particularly upstream producers with greater earnings sensitivity to the commodity.

“Higher CPO assumptions imply 2% to 4% upside risk to FY2027 and FY2028 earnings,” says Ng, reiterating CIMB’s “overweight” call on the sector, with IOI Corp Bhd, Kuala Lumpur Kepong Bhd (KL:KLK) and Hap Seng Plantations Holdings Bhd (KL:HSPLANT) as its top picks. The research house had target prices (TPs) of RM4.54, RM23.66 and RM6.86 respectively for the counters.

CGS International has highlighted upstream players such as Ta Ann Holdings Bhd (KL:TAANN) and Hap Seng, which “should record relatively stronger net CPO average selling prices compared with their Indonesian peers”. It has “add” recommendations for the two companies and TPs of RM6.85 and RM3.35 respectively.

The research house has also rated SD Guthrie an “add”, with a TP of RM7.40, citing its leverage to higher CPO prices, status as the largest oil palm planter among listed peers and ongoing non-core asset monetisation. “After a RM160 million gain from the Kulai land sale in 1Q2026, we expect two more deals in FY2026F, keeping SDG on track to reaching its RM500 million to RM700 million target,” it said.

Kenanga Research, which is also maintaining its “overweight” call on the sector, points out that despite the recent outperformance of the KL Plantation Index, the sector’s valuations — price-earnings ratio (PER) of 15 times to 16 times and price-to-book value (P/B) of 1.3 times — remain undemanding and are comparable with the average of the past three years, PER of 15 times and P/B of 1.2 times.

Like CIMB, Kenanga believes there will be “an upward bias towards firmer earnings” and has ascribed “outperform” calls on IOI Corp (TP: RM4.65), for its sector leading return on equity, contributions from its new venture and strong 4QFY2026 close; KLK (TP: RM25.20), for its sensitivity to CPO prices and stronger push into property; United Malacca Bhd (KL:UMCCA) (TP: RM7), for its maturing estates and attractive ratings and; and TSH Resources Bhd (KL:TSH) (TP: RM1.60), for its upstream CPO price sensitivity and ongoing 40% expansion in new planting.

“PPB Group Bhd (KL:PPB) (TP: RM13) appears oversold, with decade-low ratings, considering the group’s strong fast-moving consumer goods position in China, India and Southeast Asia, barring some near-term uncertainties over Wilmar International Ltd’s Indonesian operations,” Kenanga warns.

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