High inventories weigh on CPO, but 2027 outlook brightens

KUALA LUMPUR: Malaysia's record-high palm oil inventories could continue weighing on the commodity's near-term outlook, although analysts expect tightening supplies, weather-related production risks and stronger biodiesel demand to support crude palm oil (CPO) prices heading into 2027.

Palm oil inventories climbed for the seventh consecutive month to 3.62 million tonnes in October, up 3.2 per cent month-on-month, as higher opening stocks and increased production outweighed stronger exports.

Despite the inventory overhang, Public Investment Bank Bhd (PublicInvest) and Hong Leong Investment Bank Bhd (HLIB) maintained their "Overweight" calls on the plantation sector, citing expectations of tighter supply conditions and sustained CPO prices.

HLIB said elevated inventories were likely to persist in the near term as seasonally weaker exports could offset the anticipated slowdown in production from November.

"That said, a potential implementation of a palm oil export tax waiver could accelerate inventory drawdown more than currently anticipated," it said.

PublicInvest, however, expects inventories to begin easing from November as oil palm trees enter their seasonal low-production period.

Meanwhile, palm oil exports rebounded 55.7 per cent month-on-month to 1.71 million tonnes in October, marking their first monthly increase since July, supported by stronger shipments to Asia Oceania, the European Union and India.

However, export momentum weakened in early November, with Intertek Services reporting a 1.9 per cent month-on-month decline in shipments during the first 10 days.

On the supply side, Malaysian palm oil production rose 1.8 per cent month-on-month to 2.12 million tonnes in October, bringing output for the first 10 months of 2026 to 16.9 million tonnes, up 2.3 per cent year-on-year.

Looking ahead, both research firms expect seasonal production declines and the potential impact of El Nino to tighten palm oil supplies, while stronger biodiesel demand in Indonesia could further support prices.

"We maintain our 2026-2027 average CPO price assumptions of RM4,450 per tonne (2026) and RM4,500 per tonne (2027), supported by the anticipated tightening in the palm oil supply-demand balance as higher Indonesian biodiesel demand coincides with El Nino-related production losses."

PublicInvest noted that CPO prices had retreated almost 10 per cent this month following a correction in crude oil prices, which weakened the attractiveness of palm oil-based biodiesel.

Nevertheless, it believes the current weakness is unsustainable given tightening supplies in Indonesia and East Malaysia. It also highlighted the widening CPO-soybean oil price gap of US$325 per tonne, which could attract buying interest and help reduce Malaysian inventories.

For stock picks, HLIB favours Hap Seng Plantations Holdings Bhd and IOI Corporation Bhd, with target prices of RM2.81 and RM5.16 respectively.

PublicInvest's top picks are Sarawak Plantation Bhd and Ta Ann Holdings Bhd, supported by dividend yields of 8.0 to 9.0 per cent and above-industry-average fresh fruit bunch production growth, with target prices of RM5.59 and RM8.55, respectively.

Both research firms expect tighter supply conditions and resilient demand to support the plantation sector's outlook into 2027 despite near-term inventory pressures.