The palm oil market is heating up as prices rebound sharply week-on-week, driven by both supply-side disruptions and policy developments in major producing regions.

Palm Oil Prices Surge Amid Supply Concerns

The Bursa Malaysia Derivatives (BMD) spot price for palm oil rose to $1,170/mt, up from $1,083/mt last week, as heavy rains and flooding in Malaysia and Indonesia raise concerns about supply disruptions. These weather challenges are affecting palm fruit harvesting and transportation, further exacerbated by reports from the Southern Peninsular Palm Oil Millers Association (SPPOMA) of a likely 5.3% production decline in November compared to October.

This follows October’s surprising drop in Malaysian production—a month typically characterized by output growth—along with a decrease in Malaysian stock levels, adding bullish momentum to the market.

B40 Biodiesel Policy Adds Pressure on Supplies

Indonesia is set to implement its B40 biodiesel mandate in January 2025, which will require an estimated 1.5 million tons of Crude Palm Oil (CPO) for biodiesel production, According to RKS Insights.

This significant policy shift is expected to drastically reduce export surpluses.

According to RKS Insights, “Indonesia’s surplus for exports will drop due to higher biodiesel consumption, leaving Malaysia to carry the burden of demand. Palm oil prices could remain expensive for quite some time, especially given stagnant yield growth in both Malaysia and Indonesia, which limits production expansion.”

Malaysia’s ability to shoulder this demand burden remains uncertain, particularly in the face of current weather-related disruptions and declining export-to-production ratios, which are expected to fall further to 21.49% in 2024, reported RKS.

The combination of reduced output, tightening global supplies, and Indonesia’s policy shifts are likely to keep palm oil prices elevated in the short to medium term, said RKS. Additionally, the Indonesian government’s increases in taxes and reference prices could provide further support for high price levels.

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