Bloomberg Just five months ago, benchmark futures in Malaysia languished at four-year lows as investors fretted about stubbornly high stockpiles, waning demand from top buyers India and China and European restrictions that linked palm oil to environmental harm. Then in October, a trade spat between No 2 producer Malaysia and India threatened to further hit sales and prices.

That all changed at an industry conference in Bali, where top analysts warned that dry weather and haze will hurt production, just as Indonesia focusses on implementing an ambitious, compulsory biofuel programme.

That gave another leg-up to prices, extending the rally from the July low by 50 per cent to more than 2,900 ringgit ($700) a tonne and putting the market on track for a 35 per cent gain this year, its best performance in almost a decade, reversing planter fortunes. By contrast, soyabean oil is up 22 per cent this year.

Most industry players see prices of the oil staying at elevated levels in 2020. Benchmark futures may average 2,600 ringgit a tonne, the highest in three years, according to the median of 25 estimates in a Bloomberg survey, versus an average of 2,240 ringgit this year.

“Lower production at origins, increasing biodiesel mandates and robust food demand would be the key price drivers next year,” said Anilkumar Bagani, research head of Sunvin Group, a Mumbai-based broker and consultant.

Here’s what industry participants are watching:

Biofuel boom

Indonesia’s B30 biofuel mandate is key to palm oil’s price direction. The policy “will help increase crude palm oil prices, improve plantations’ finances and help to channel biodiesel into the domestic market,” said Sathia Varqa, owner of Palm Oil Analytics in Singapore.

But biofuel mandates in Indonesia and Malaysia are facing scrutiny, especially as palm oil trades at a fat premium of almost $100 a tonne to gasoil, compared with an average discount of $54 in the past year. The industry is watching whether Indonesia reimposes export levies to fund the mandate. That’s more likely now that No 2 grower Malaysia is set to hike its own export duty from January.

Weak production

Analysts are trimming their outlook for production in Indonesia and Malaysia due to dry weather and lack of fertiliser application spilling into 2020. Industry watchers will be monitoring fresh fruit bunches to gauge production trends in the coming months, especially if there are signs of an uptick in yields.

Demand buoyant

The rally has been so fierce it threatens the oil’s traditional role as a cheap vegetable oil for food and fuel. Palm hit parity with soyabean oil for the first time since 2011, reducing its appeal versus other oils and prompting buyers to turn to alternatives.

Going green

Industry efforts to be more sustainable and avoid being dubbed a climate villain will become more important in 2020, especially since it could lead to more companies or countries restricting use of palm. There are fears that the EU, which wants to phase out palm use in biofuel, may look to food next.

Meanwhile, weather calamities that affect soyabean crops in the US and South America, or sunflower in the Black Sea countries could tighten supplies and lift edible oil prices including palm.

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