Global palm oil prices are expected to rise significantly due to tight supply conditions and favorable market dynamics. According to research agency BMI, a unit of Fitch Solutions, the forecast for front-month Bursa Malaysia-listed crude palm oil futures has been raised to MYR 4,453 per tonne for 2026, up from the previous MYR 4,300 forecast held since October 2025. This represents a 4% increase from the 2025 average of MYR 4,279 per tonne. BMI expects prices to average MYR 4,550 per tonne this quarter and MYR 4,582 in the next quarter, continuing into the first quarter of 2027. As per BMI, palm oil, which accounts for approximately 35% of global vegetable oil production, is expected to remain elevated due to supply constraints and favorable demand dynamics. Recent market developments show that a very strong El Niño is forming, creating additional pressure on palm oil and other agricultural commodities in Southeast Asia, South Asia and South America, with a 6-12 month lag meaning the real global food-inflation shock is only beginning.
The market faces a significant supply-demand imbalance that will drive prices higher. According to BMI, global output is expected to remain broadly flat, held back by a 3.5% decline in Malaysian production to 19.5 million tonnes in 2026/27. This is set against consumption growth of 2.7% year-on-year to 79.9 million tonnes. The production surplus that existed in 2025-26 at 3.6 million tonnes is expected to narrow substantially, with global production reaching 81.4 million tonnes in the 2026-27 season, a marginal decline of 20,000 tonnes from 2025-26. Indonesia and Malaysia, which dominate the industry producing over 85% of global supply, continue to face production challenges that will support higher prices. The El Niño phenomenon is expected to create additional supply constraints across multiple agricultural sectors, with palm oil being particularly vulnerable to weather-related disruptions.
Indonesia's implementation of a mandatory B50 biodiesel blending program from July 1 represents a major demand driver for palm oil. As reported by BMI, this program will divert additional palm oil from the export market into the domestic fuel pool, significantly impacting global supply availability. The program makes Indonesia the first country to implement such a high biodiesel blend, with the country's production projected to reach 47.5 million tonnes in the next season, up 1.7% from the current season. Additionally, Malaysia's biodiesel program with a B15 blend and Thailand's push for B20 will further constrain export availability. The biodiesel mandates are particularly significant as they represent a structural shift in palm oil demand patterns, with Indonesia and Malaysia accounting for roughly 40% of global palm oil production through smallholder farmers.
Palm oil futures are currently trading at MYR 4,884 per tonne for November contracts on the Malaysia Derivatives Exchange, with spot prices at MYR 4,946. According to market data, palm oil has gained nearly 20% this year, reflecting the strong upward momentum in prices. The combination of robust Indian restocking ahead of the festive season and disruption of shipments of competing oils in the Black Sea region is providing additional support to current price levels. Recent market trends show significant price fluctuations influenced by environmental regulations, labour practices, and changing consumer preferences, with the commodity playing a crucial role across food, cosmetics, and biofuels sectors. The ongoing El Niño conditions are expected to create additional price volatility as weather patterns disrupt global agricultural supply chains.
Despite recent challenges, analysts remain optimistic about Kuala Lumpur Kepong Bhd (KLK)'s prospects given stronger plantation earnings amid higher crude palm oil prices. CGSI Research has reiterated an 'add' call on KLK with an unchanged target price at RM25.65, noting the stock offers an attractive dividend yield of about 5% for FY27 to FY28. Kenanga Research has upgraded KLK's FY27 core earnings per share by 6% to 163.9 sen on a stronger CPO price outlook, maintaining an 'outperform' call with a 2% higher target price of RM25.80. The risk of supply tightening further is high due to rising biodiesel usage due to the ongoing Middle East conflict, disruption to sunflower exports as Ukraine's main Black Sea port and naval base at Odessa is increasingly being targeted by Russia, and the near-certainty of a severe El Niño later this calendar year. Fresh fruit bunch production improvements through new agronomic practices and investments should help improve KLK's upstream productivity despite expected slight decline in FY27 fruit production.
