CPO set to rise in first half of 2026 as El Nino hits supply

KUALA LUMPUR: Crude palm oil (CPO) prices are expected to remain rangebound in the short term before rising in the first half of 2027, as El Nino starts to weigh on production and stock levels moderate.

RHB Research said El Nino had been confirmed by most weather models and was expected to be very strong and last until the first quarter of 2027.

While its impact on palm oil production has yet to emerge, ramifications are expected from the first quarter of next year, coinciding with the low cropping season.

"Once stock levels start to diminish from the current highs, CPO prices could trend upwards in the first half of next year," it said.

RHB Research maintained its 2026 and 2027 CPO price assumptions at RM4,400 and RM4,500 per tonne respectively.

In the near term, it expects CPO prices to remain rangebound due to the peak production season and high stock levels.

Spot CPO prices have remained volatile amid ongoing geopolitical developments, although the correlation between CPO and crude oil prices has moderated to about 0.59 times from a peak of 0.91 times in the second quarter.

"This indicates that the Middle East conflict has less impact on CPO prices than it did initially, akin to what happened in the early stages of the Russia-Ukraine war," the firm said.

It noted that crude oil prices had risen 38.6 per cent, compared with a 17 per cent increase in CPO prices.

This pushed the palm oil-gas oil (POGO) spread to positive US$19 per barrel, with CPO prices now lower than gas oil prices.

The positive POGO spread could encourage Indonesia to consider raising its biodiesel mandate to B60 in 2027 from B50 currently.

This would remove an additional five million to six million tonnes of palm oil supply from the global market and further raise scarcity premiums.

There is also the possibility of discretionary biodiesel demand of three million tonnes per annum returning should the POGO spread remain positive, it said.

Meanwhile, demand, which is currently relatively weak, could improve from the end of September.

This follows India's reduction in import duty on CPO to five per cent from 10 per cent and refined palm oil to 27.5 per cent from 32.5 per cent.

Another factor to watch is Indonesia's proposed Agrarian Reform Law, which could require planters to redistribute 20 per cent of their land or make a mandatory profit-based payment to address land ownership inequality.

RHB Research said it was unclear whether the requirement could be met through existing plasma plantations, while uncertainty remained over whether the proposed law could affect existing landowners despite stating that it would not be retroactive.

If implemented, the law could weigh on productivity in Indonesia and further tighten palm oil supply, it said.

Given the recent pullback in CPO and share prices, RHB Research said this provided an opportunity for investors to buy on weakness.

It maintained an "Overweight" call on the plantation sector, focusing on Malaysia-centric and less Indonesia-exposed players.

This includes Sarawak Oil Palms Bhd, IOI Corp Bhd, Hap Seng Plantations Holdings Bhd, SD Guthrie Bhd, Johor Plantations Group Bhd, PT PP London Sumatra Indonesia Tbk and First Resources Ltd.