On Friday (August 21), the November contract for crude palm oil futures on the Malaysian Derivatives Exchange closed at 5020 ringgit per tonne, up 59 ringgit, or 1.19%, equivalent to $1244.11 per tonne. The market closed higher for the fifth consecutive trading day, with a cumulative weekly gain of 6.58%, the largest weekly increase in 24 weeks; prices have been consistently approaching the December 2024 high since Tuesday. Market sentiment indicates that supply-side concerns have significantly outweighed the temporary weakness in export data, with bullish pricing logic dominating.

Expectations of production contraction are rising.

The core driver of this round of price increases comes from the production side. Data from the Southern Peninsula Palm Oil Crushers Association (SPPOMA) shows that Malaysian palm oil production fell by 3.14% month-on-month from August 1st to 20th. A trader in Kuala Lumpur stated that the impact of El Niño drought on output may begin to appear in the fourth quarter, a judgment that directly supports the market. The Malaysian Palm Oil Council (MPOC) gave a more specific forecast: fourth-quarter production is expected to decline year-on-year. The agency pointed out that the oil extraction rate was relatively strong in the first five months of 2026, but declined significantly in June and July, and may continue to be below average for the remainder of the year. Insufficient elasticity of supply recovery means that the pace of inventory rebuilding may be slower than previously expected by the market, thus strengthening the support for near-month contracts.

Weak exports have not reversed the upward trend.

Data from shipping surveyor Intertek Testing Services shows that Malaysian palm oil exports fell 13.2% week-on-week from August 1st to 20th; AmSpec Agri Malaysia's estimate for the same period was a 5.5% decline. While the two agencies differed in the magnitude of the decline, their overall direction was consistent. Weak exports typically put downward pressure on prices, but this week's market did not see a correction; instead, it rose consecutively, indicating that expectations of supply contraction have a significantly higher weight in marginal pricing. Market funds are more focused on future production realization rather than the immediate export pace. External edible oil markets also provided support: Dalian palm oil futures rose 0.77%, soybean oil futures rose 0.17%; CBOT soybean oil fell 0.29%. Crude oil prices fell slightly on Friday, but are still on track for a second consecutive weekly gain. The unresolved supply disruptions in the Middle East continue to impact the risk premium in the vegetable oil market.

Institutional Views and Market Variables

Earlier this week, the MPOC stated that crude palm oil prices in September are expected to remain stable above 4,600 ringgit/tonne due to tightening supply and disruptions in global edible oil trade flows. This price level, approximately 420 ringgit below the current market price, is not a bearish signal but rather a confirmation of support levels. Current prices already include some weather premiums; if fourth-quarter production declines are less than expected, or if export declines continue to widen, there is a possibility of the market giving back these premiums. Conversely, if high-frequency production data from SPPOMA and MPOA weakens further, prices still have a basis for continued strength. Going forward, it is crucial to monitor the monthly production-export gap in Malaysia, changes in Indonesian export policies, and the pace of restocking in major consuming countries.

Frequently Asked Questions

Question 1: Why did palm oil record its largest weekly gain in 24 weeks this week? Answer: The core driver was concerns about production. SPPOMA showed a 3.14% week-on-week decrease in production from August 1st to 20th. Combined with MPOC's forecast of a year-on-year decrease in fourth-quarter production, the market concentrated on pricing in supply contraction, driving a significant weekly rise. Question 2: Why didn't the decline in export data suppress prices? Answer: While exports saw a significant week-on-week decrease from August 1st to 20th, the expectation of supply contraction has a higher weighting at this stage. The market has closed higher for five consecutive days, indicating that funds are more focused on future production realization rather than the immediate export pace. Question 3: What is MPOC's view on September prices? Answer: MPOC expects crude palm oil prices to remain above 4600 ringgit/ton in September, citing tightening supply and disruptions in global edible oil trade flows. This price level is a support reference, not a bearish signal; the current market is already above this level. Question 4: When will the effects of El Niño appear? Answer: Traders and MPOC both point to the fourth quarter. Oil extraction rates declined significantly in June and July, and are likely to remain below average for the remainder of the year, indicating that the lagged effects of drought are being transmitted to the supply side. Question 5: What variables need to be monitored going forward? Answer: Malaysian MPOB monthly production and inventory, SPPOMA/MPOA high-frequency production, August export shipments, Indonesian palm oil policy, and the correlation between crude oil and CBOT soybean oil.