17.07.2023 (Investors Observer) - Palm oil prices have drifted upward this month as investors focus on Indonesia’s export restrictions and El Nino trends. Malaysia’s palm oil was trading at MYR 3,902 on Monday, higher than the year-to-date low of MYR 3,200. Still, the price remains sharply lower than the pandemic high of MYR 7,104.

El Nino concerns

Palm oil is one of the most important commodities in the world today. It is widely used to manufacture edible oils, soaps, and other products. Most of the world’s palm oil comes from countries like Indonesia, Malaysia, Netherlands, Guatemala, and Papua New Guinea among other. Its biggest importers are countries like India, China, and Pakistan.

Palm oil price has drifted upwards as investors react to the ongoing threat of El Nino. Earlier this month, the United Nations warned that El Nino had arrived. In its report, the World Meteorological Organisation (WMO) warned that there was over 905 probability that El Nino will remain to the end of 2023. US authorities expect that the chance of an even stronger El Nino at 56%.

El Nino is a severe weather event that leads to more floods in countries like the United States and South America. On the other hand, it brings substantial heat to countries like Indonesia, Malaysia, and Central America. Some of these countries are the biggest producers of palm oil and could go through droughts and fires.

Palm oil prices tend to jump when there is an El Nino because of a decrease in production because of a drought.

At the same time, Indonesia has mandated protectionist rules on palm oil exports. On August 1, the government will implement a mandate to have 35% of all palm oil blended in biodiesel. It has also placed rules to mandate exporters to sell a portion of the output to the domestic market.

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Demand is still rising

The most recent data shows that palm oil production has been a bit weak this year. Malaysia, the second-biggest producer in the world, has had the lowest output in the first four months of the year. It then rose slightly in May as production jumped at the fastest pace since March 2020.

Despite the ongoing El Nino threats, the reality is that severe weather effects usually affect palm oil production in about 6 months. At the same time, palm oil demand is rising. Data shows that the global palm oil market was valued at over $67.3 billion in 2022 and is expected to have a CAGR rate of 5.1% in the coming years.

Therefore, there is a likelihood that palm oil prices could continue rising in the coming months. If this happens, there is a likelihood that prices could recover to about MYR 4,500, the highest point in August and October 2022 and March 2023.

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