Palm oil stocks set to peak, CPO prices at turning point

KUALA LUMPUR: Malaysian palm oil inventories are expected to peak in October after rising for a sixth consecutive month in September, potentially marking a turning point for crude palm oil (CPO) prices, according to Public Investment Bank Bhd (PublicInvest).

The firm expects inventories to exceed three million tonnes in September, the highest level since 2018, driven mainly by weaker demand from China, Europe and the Middle East during the high production season.

It said demand had also shifted towards Indonesian CPO, which was cheaper than Malaysian CPO.

"This was evident in August, when Indonesia's palm oil exports increased by 35 per cent month-on-month (MoM), while Malaysia's exports declined," it said in a note.

PublicInvest expects Malaysia's inventory cycle to begin trending lower from November as production growth moderates, with a more pronounced drawdown anticipated in mid-2027 due to the lagged impact of El Niño on fresh fruit bunch (FFB) yields and CPO production.

It said a sustained decline in Malaysian palm oil inventories would provide a stronger fundamental basis for a recovery in CPO prices, which are likely to regain momentum once inventories show signs of peaking.

Year-to-date, CPO prices have averaged RM4,430 a tonne and are expected to move closer to PublicInvest's full-year assumption of RM4,500 a tonne.

PublicInvest maintained its "Overweight" stance on the plantation sector, citing the potential impact of El Niño-related weather disruptions on global palm oil supply and sustained strength in crude oil prices.

It said the eventual intensity and duration of the current El Niño remained uncertain, although recent sea-surface temperature readings resembled the strong 1997/98 episode, warranting close monitoring of weather conditions and their potential impact on agricultural yields.

"While near-term sentiment has been weighed down by the recent correction in CPO prices and elevated Malaysian palm oil inventories, we believe the sector's outlook could improve as inventories approach a cyclical peak and the lagged impact of El Niño begins to weigh on palm oil production," it said.

A stronger-than-expected El Niño could lower FFB yields across key producing regions, tightening the global vegetable oil balance and providing upside support to CPO prices, it added.

Higher crude oil prices could also improve the relative competitiveness of palm-based biodiesel, supporting palm oil demand as a feedstock.

Meanwhile, Indonesia's planned B50 biodiesel mandate is expected to provide an additional structural demand catalyst by increasing domestic CPO consumption and reducing export availability.

PublicInvest maintained Sarawak Plantation Bhd and Ta Ann Holdings Bhd as its preferred stocks, given their attractive valuations, earnings growth prospects and relatively strong exposure to an anticipated improvement in the CPO cycle.