On Tuesday (July 21), crude palm oil futures on the Malaysian Derivatives Exchange (BMD) fell under pressure. The benchmark October contract closed at 4,609 ringgit per tonne, down 34 ringgit or 0.73% from the previous trading day. The market failed to maintain the momentum from the previous trading day's climb to near one-month highs, instead giving back some of its gains due to weakness in the external vegetable oil market and a decline in crude oil prices.

External markets exerted pressure, and export data presented mixed signals.

The downward pressure on palm oil prices stemmed primarily from the weakening of the global edible oil market. During Tuesday's Asian trading session, the main futures contracts for soybean oil and palm oil on the Dalian Commodity Exchange recorded declines of 0.55% and 1% respectively, while soybean oil prices on the Chicago Board of Trade also softened. As a feedstock for biodiesel, palm oil is highly sensitive to fluctuations in crude oil prices. The over 1% drop in international oil prices that day diminished the short-term appeal of palm oil as an alternative energy source, prompting some speculative funds to take profits. Regarding export demand, data released by shipping survey agencies were conflicting. AmSpec Agri Malaysia data showed a slight 0.9% decrease in exports from July 1-20 compared to the previous period, while Intertek Testing Services (ITS) reported a 4.1% increase during the same period. This mixed export data failed to provide a clear direction for the market. Kuala Lumpur traders noted that the benchmark contract fluctuated narrowly above the key psychological support level of 4600 ringgit, and although it opened under pressure, the resilience at this level temporarily limited the decline.

El Niño theme deepens, long-term production concerns emerge.

The market's current trading logic is shifting from immediate supply and demand to medium- to long-term climate disruptions. The Malaysian Meteorological Department has explicitly warned that with the strengthening of El Niño, the country may face record-breaking heat in 2027, with rainfall in core palm oil producing regions such as Sabah and Sarawak expected to decrease significantly. This warning has reinforced market expectations of a future supply contraction. Weather forecasts indicate that this El Niño event may peak between March and May 2027, at which time the national maximum temperature could surpass the historical record of 40.1 degrees Celsius set in 1998. Historical data shows that the impact of strong El Niño on production often has a lag. During the strong El Niño period of 2015-2016, Malaysian palm oil production recorded a 13.2% year-on-year decline. CGS International Securities Malaysia analysis points out that potential supply constraints in the second half of this year and next year, particularly a possible decline in output in Indonesia, may create a more favorable pricing environment for Malaysian producers. However, the market's digestion of weather-related news has shown some degree of sluggishness. Changjiang Futures Research points out that, benefiting from the delayed precipitation effect of the previous La Niña and the short-term positive impact of drought on harvesting and transportation, the inventory in producing areas may remain high or even continue to accumulate in the third quarter of 2026. This will offset the speculative sentiment related to weather to some extent, making it difficult for prices to rise sustainably in the short term.

Market Outlook: Short-term bearish and long-term bullish logic coexist.

In summary, the palm oil market is caught in a tug-of-war between immediate inventory pressure and long-term production cut expectations. Weak export data and a pullback in energy prices are providing short-term resistance, but the effectiveness of support at the 4600 ringgit level and the continued impact of El Niño limit downside potential. CGS International maintains its "overweight" rating on the Malaysian plantation sector, supported by structural demand from Malaysian and Indonesian biodiesel contracts and palm oil's price advantage relative to soybean oil. For professional traders, the pace of inventory accumulation in the third quarter and the potential shift to production cuts in the fourth quarter will be key variables determining trend opportunities. [Frequently Asked Questions] Q: Why did the market pull back today after yesterday's surge? A: The direct trigger was the overnight decline in crude oil prices and the weakening of the Dalian vegetable oil market, which drove arbitrage funds across commodities. Although the weather theme remains, short-term export demand data is mixed, lacking further bullish stimulus, leading the market to test the 4600 ringgit support level. Q: Export data from ITS and AmSpec conflict; which should be trusted? A: The two institutions use different statistical samples and methods. ITS data shows a 4.1% month-on-month increase in exports from July 1st to 20th, while AmSpec shows a slight decrease of 0.9%. This reflects differences in the loading pace of different terminals or types of goods. The key point is that neither shows a significant collapse in demand, and compared to previous data, exports are in a state of mild fluctuation. Q: What is the core contradiction in market transactions? A: The core contradiction currently lies in the divergence between "current inventory reality" and "expectations of future production cuts." Current inventories in producing areas are high, and the pressure of inventory accumulation in the third quarter remains; however, the substantial threat of El Niño to producing areas next year is being gradually priced in by institutions. This timing mismatch has led to repeated fluctuations in the market. Q: Are the institutions' assessments of the impact of El Niño monolithic? A: Not at all. While institutions like CGS International are bullish on long-term supply tightening, analysts such as Changjiang Futures point out that the impact of drought on palm oil yields typically lags by 8-10 months, and the third quarter still retains the residual positive effects of increased rainfall from earlier periods. Market interpretations of a "strong El Niño" event are divergent in terms of timing, which is a key reason for the lack of a clear short-term trend. Q: What impact does biodiesel demand have on current prices? A: Biodiesel demand is a crucial factor supporting the price floor. Institutions believe that biodiesel blending policies in Malaysia and Indonesia provide structural demand support, while palm oil still maintains a price advantage over soybean oil. This limits the overall downside potential of vegetable oil prices and is the underlying reason why the 4600 ringgit support level is temporarily effective.