On Friday (June 12), palm oil futures on the Malaysian Derivatives Exchange encountered significant selling pressure, with the most active August contract plunging 72 ringgit, a drop of 1.58%, to close at 4,479 ringgit per tonne (approximately US$1,104.56). This closing price not only broke through a key psychological level but also marked a new low in over two weeks since May 25. Looking at the weekly chart, the cumulative decline this week was locked at 1.65%, completely ending the previous three-week upward trend. The core logic driving this correction is that although there are signs of recovery on the export side, the sudden surge in production on the supply side, coupled with the long-term shadow of El Niño, has intensified the battle between bulls and bears, with the bears temporarily gaining the upper hand.

Key variables emerge in the supply and demand marginal game.

The core contradiction in the current market lies in the intense struggle between the sudden surge in short-term supply and the expectation of a medium-term demand recovery. Paramalingam Supramaniam, director of Pelindung Bestari, offered a significant on-site observation: "Compared to May, there are indeed subtle signs of a cautious recovery in exports, but at the same time, we are observing a sudden surge in production, particularly in Peninsular Malaysia." This latest change in "production surge" is the direct needle piercing bullish sentiment. Although well-known institutions estimate, based on data from cargo survey agencies, that Malaysian palm oil product exports from June 1st to 10th increased by 3.5% to 4.9% month-on-month, this is still insufficient to offset the impact of immediate supply pressure. Market concerns about the supply side have clearly outweighed the slowly recovering external demand in the short term, leading to a continuous breakdown in futures prices.

The long-term rise and short-term reality of El Niño

Discussions surrounding the El Niño weather pattern have imbued current trading with a strong sense of dilemma. While weather models predict hot, dry weather in Asia starting this month, the actual physical reduction in yield has not yet been reflected in current inventory data. The Malaysian Minister of Economic Affairs has warned that El Niño could lead to an average decrease of 8% to 10% in the country's crop yields this year. Supramaniam further added, "The market is expected to remain within a narrow range as participants await further developments in the El Niño weather pattern, which is widely expected to reduce rainfall and impact future yields." This statement accurately captures the market's conflicted mindset: on one hand, there are extreme expectations of significant future yield reductions, and on the other hand, there is the immediate pressure of high spot yields. While trading at a forward premium, the market must confront the immediate reality of delivery; this contradiction in the term structure has led to a clear desire for profit-taking at higher levels.

Vegetable oil price spread and multiple pressures from macroeconomic factors

While palm oil's own fundamentals were under pressure, the external market environment also created a resonant squeeze. The weakness of substitute oils weakened palm oil's competitive pricing power. Trading data from the same day showed that soybean oil prices on the Chicago Board of Trade fell by 1.85%, and although the main soybean oil contract on the Dalian Commodity Exchange rose slightly by 0.04%, its palm oil contract still fell by 0.48%, failing to provide effective support. More critical pressure came from the energy sector. With international crude oil prices plummeting by more than 4%, hitting a near two-month low, the economic appeal of palm oil as a biodiesel feedstock was significantly reduced, directly suppressing its valuation potential in the industrial demand sector. Furthermore, the ringgit strengthened by 0.22% against the US dollar that day, making ringgit-denominated palm oil more expensive for buyers holding foreign currency, further limiting potential buying power.

Future projections: Focus on expectation gaps and the pace of inventory rebuilding

Looking ahead, the market's breakout point will no longer solely depend on the single expectation of El Niño, but will require close monitoring of the expectation gap and the pace of inventory rebuilding. If El Niño fails to rapidly develop into severe drought during the critical growing season of July and August as predicted by models, the weather premium currently embedded in the market will face the risk of being quickly squeezed out. Conversely, if precipitation in producing regions experiences a substantial decline in the short term, coupled with continued positive revisions to export data, it will reignite market concerns about long-term supply gaps. Traders need to shift their focus from simple "weather stories" to more concrete inventory changes and high-frequency production data. Only when high-frequency data resonates with long-term expectations will the market break out of its current consolidation range, suppressed by short-term negative factors.

Frequently Asked Questions

Question 1: Why did palm oil prices plummet despite expectations that El Niño might lead to reduced production?
The market trades on a combination of expectations and reality. While El Niño is expected to reduce rainfall and lead to lower yields in the coming months, this impact has a significant lag, typically taking four to six months to manifest in output data. On June 12th, the more immediate trigger was the "sudden surge in production" in Peninsular Malaysia, a negative factor that immediately impacted the market. Coupled with a single-day drop of over 4% in crude oil prices, which severely weakened expectations for palm oil biodiesel demand, the market ignored long-term positive factors and focused on immediate supply pressures.

Question 2: How do analysts assess the current short-term market conditions and medium-term risks?
A professional from Pelindung Bestari provided a very balanced assessment. In his report, he pointed out both "signs of a cautious recovery" on the export side and widespread market concerns about future production cuts due to El Niño; on the other hand, he also astutely noted the recent surge in production on the Korean Peninsula. He believes that this tug-of-war between bullish and bearish factors is causing the market to "maintain fluctuations within a narrow range," with everyone waiting for clearer weather signals to determine the next trading direction.

Question 3: Since exports were increasing in early June, why did the recovery in exports fail to support the market?
The strength and pace of the export recovery have not yet been able to offset the sudden pressure on the supply side. Although the month-on-month export growth rate for the first 10 days of June was between 3.5% and 4.9%, this is only short-term data at the beginning of the month and has been described as a "cautious recovery," indicating that the market has doubts about whether exports can maintain their high levels. In contrast, the sudden jump in production in the peninsula region is an immediate and unexpected change. Given the significantly increased spot supply pressure, the moderate export rebound is not enough to allow bulls to stabilize their positions.

Question 4: What is the mechanism by which crude oil price and exchange rate fluctuations affect palm oil?
There are two direct transmission paths. First, the decline in crude oil prices directly squeezes the profit margin of palm oil blending in the biodiesel industry, leading to a cooling of expected demand for palm oil used in fuel production. Second, palm oil futures are priced in the Malaysian ringgit. When the ringgit appreciates against the US dollar, it means that overseas traders holding US dollars will have to pay more in their local currency to purchase the same quantity of palm oil, which will dampen the purchasing willingness of international buyers.

Question 5: What signals should traders pay attention to that could break the current stalemate in the market?
In addition to continuing to track high-frequency export and production data, the key focus should shift to the actual implementation of the El Niño phenomenon. The emphasis should no longer be on meteorological model forecasts, but rather on actual rainfall data and soil moisture indices in the core production areas of Malaysia and Indonesia during the critical growing season from June to August. Only if these indicators deteriorate more drastically than expected will the market re-inject long-term production reduction expectations into current pricing, breaking the current sideways or weak trend.