Global palm oil production will likely increase during the 2023-24 season (November-October), though there are risks of the warm ocean water phenomenon El Nino affecting the output.

“We forecast that global palm oil production will increase by 3.6 per cent year-on-year (y-o-y) to 80 million tonnes (mt) (subject to downside El Nino-driven risks),” research agency BMI, a unit of Fitch Solutions said. 

According to the US Department of Agriculture (USDA), palm oil production across the globe next season is likely to be 2.4 per cent higher YoY at 79.46 mt compared with 77.58 mt this season. 

Water stress in Malaysia

“El Nino may  impact palm oil yield around December. Currently, production in Malaysia is being affected due to water stress, which is impacting production in August -the peak production month,” said Lahore-based Abdul Hameed, Director- Sales, Manzoor Trading  Pakistan. 

Malaysian States such as Sabah and Sarawak are witnessing a drop in production, he said. 

“At the present time (and subject to change over the next six months), we anticipate close-to trend palm oil production growth in both Indonesia and Malaysia based upon the as-yet unknown strength of El Nino, noting that direct comparisons to 2014-16 contain an implicit assumption of a historically severe El Nino event,” BMI said.

According to the US weather agency National Oceanic and Atmospheric Administration’s Climate Prediction Centre, there is a 20 per cent chance of the El Nino developing into a strong event historically as during 2014-16.

Rise in consumption

The Australian Bureau of Meteorology said the chance of an El Nino developing in the coming season has increased. When these criteria have been met in the past, an El Nino event has developed around 70 per cent of the time, the bureau said.

BMI said global palm oil consumption will increase by 3.7 per  cent y-o-y to 78.9 mt in 2023-24. The USDA has projected the offtake at 77.51 mt compared with 74.73 mt this season. 

“Palm oil demand is increasing due to weather conditions in Asia. With festival demand ahead, palm oil is the cheapest oil in the Asian region. India, which imported 1 mt in July, is still actively buying,” Hamid said. 

The USDA sees palm oil ending stocks a tad lower at 16.67 mt against 16.74 this season. These estimates have turned the focus on how prices will behave, going forward. 

Upside risk

“We see the global palm oil balance remain more-or-less unchanged when compared to the estimated 1.1 mt surplus in 2022-23,” BMI said.

The research agency said the current El Nino event posed a major upside risk to its average palm oil price outlook over the next 12-18 months. Much depends on the eventual strength of the El Nino event itself. 

“During the 2014-16 El Nino, below-average moisture levels across Indonesia and Malaysia saw monthly palm oil prices increasing in the fourth quarter of 2015 and peaking in the fourth quarter next year, gaining about 1,000 Malaysian ringgits (MYR) a tonne over the period,” the research agency said.

It has forecast crude palm oil third-month futures to average at 3,800 MYR in 2023. “Up to the time of writing, contracts have traded an average price level of 3,804 MYR on a year-to-date basis and at an average price level of  3,753 MYR through the third quarter to date,” BMI said. 

Similarly, the research agency has forecast 2024 average palm oil prices at 3,400 MYR. Manzoor Trading’s Hamid said in the near-term,  palm oil prices will rule between 3,800 and 4,500 MYR. 

During the weekend, Malaysian crude palm oil November contract was quoted at 3,869 MYR on Bursa Malaysia Derivatives Exchange.