On Friday (September 4), trading on the Bursa Malaysia Derivatives Exchange (BMD) closed with the benchmark November crude palm oil contract settling at 4,931 ringgit per tonne, up 27 ringgit or 0.55%, for a weekly gain of 0.76%, recovering some of the previous week's losses. Spot market prices showed significant divergence on the same trading day: data from broker Mattes & Porton Bhd showed that September shipment RBD palm oil FOB Malaysian ports were quoted at $1,187.50 per tonne, down $2.50; October-December shipments were quoted at $1,232.50, down $2.50; while January-March shipments were quoted at $1,312.50, up $10; and April-June shipments were quoted at $1,332.50, up $15. September crude palm oil for delivery in southern Malaysia was quoted at 4,650 ringgit per tonne, down 20 ringgit. Near-term selling pressure persisted, while buying interest strengthened in longer-term contracts, further tilting the spread structure towards a contango market.

Spot market divergence and El Niño pricing

David Ng, a proprietary trader at Kuala Lumpur-based Iceberg X Sdn Bhd, pointed out that crude palm oil futures rose due to El Niño's impact on Malaysia and Indonesia, with continued market concerns about medium-term production. This assessment is corroborated by the spot market: the decline in September shipment prices indicates that there has been no substantial contraction in immediate supply, and selling pressure remains; however, the increases of $10 and $15 in January-March and April-June shipment prices respectively show that traders have begun to reserve premiums for potential production losses in the first half of 2027. The BMD benchmark November contract rose by only 0.55%, not significantly stronger than the far-month prices, indicating that this round of gains is not driven by near-term squeeze due to tight inventory, but rather by anticipated trading concentrating on far-month contracts. The current rate of expansion of the far-month premium is noteworthy; if near-month prices continue to weaken while far-month prices strengthen independently, it suggests that the market's trading on El Niño's production reduction is not yet over.

External oil price divergence and crude oil constraint

On September 4th, Dalian soybean oil futures fell 0.19%, palm oil futures fell 0.39%, and Chicago Board of Trade soybean oil prices declined 0.46%. Amidst a general weakening of major competing edible oils, BMD palm oil bucked the trend and closed higher. While the divergence was not significant, it was enough to indicate that weather premiums outweighed the soybean oil correlation factor in the short term. Regarding crude oil, prices fell on the day but still recorded weekly gains, as escalating tensions between the US and Iran led to a revaluation of Middle East supply risks. Weak crude oil prices will reduce the economic viability of palm oil as a biodiesel feedstock, putting pressure on demand. However, this negative factor is currently partially offset by weather premiums. If crude oil continues to weaken and El Niño expectations do not strengthen further, the upward momentum of far-month prices will be limited.

Indonesian supply variables and policy signals

Two variables are worth monitoring in the news. First, Indonesia is establishing a new commodity exchange in an attempt to control global pricing power for its resources. However, some analysts believe that this platform will struggle to compete with established exchanges, and if participation becomes mandatory, it could actually lead to market inefficiency. Second, Mohammad Abdul Ghani, CEO of Indonesian state-owned plantation company Agrinas Palma Nusantara, stated that the company aims to reach 1.5 million tons of palm oil production next year. If this target is achieved, it will increase medium-term supply, potentially suppressing the current contango premium. However, this target is still in the planning stage and needs to be assessed in conjunction with the actual impact of El Niño. Indonesian supply is one of the core contradictions in contango pricing. If weather does not cause substantial production reduction, coupled with Agrinas's increased production, the contango premium may recover. Conversely, if El Niño causes actual damage to Indonesian production areas, neither exchange competition nor production targets will be able to prevent further price increases.

Follow-up Focus

Traders should continue to monitor the actual impact of El Niño on precipitation patterns in Malaysia and Indonesia, the details of the rules and participation methods of the new Indonesian exchange, the progress of Agrinas' production target implementation, and the pace of shipments by major importing countries in the far-month window. Whether the geopolitical premium for crude oil can be sustained will also affect the marginal pricing of palm oil biodiesel demand.

Frequently Asked Questions

Q: Why did near-month spot prices fall while far-month prices rose? A: Near-month shipping prices reflect the current supply situation. The decline in September crude palm oil and near-month RBD prices indicates that immediate selling pressure in producing regions has not subsided. The rise in far-month shipping prices reflects market expectations that El Niño may cause production cuts in the first half of 2027. This divergence between near-term weakness and far-term strength is a result of pricing in long-term supply risks. Q: Why did BMD palm oil rise independently when soybean oil fell? A: On that day, Dalian soybean oil, palm oil, and CBOT soybean oil all fell, but BMD palm oil rose against the trend, supported by the El Niño weather premium. Although palm oil and soybean oil are substitutes, weather risks on the supply side are more dominant in the short term, thus resulting in a temporary divergence. Q: What impact will Indonesia's new commodity exchange and Agrinas' production targets have on the market outlook? A: If the new exchange fails to attract liquidity or force participation, it may disrupt trading efficiency, but the actual impact will be limited. If Agrinas achieves its 1.5 million-ton production target for next year, it will increase medium-term supply and put downward pressure on the forward premium. Both are potential supply variables and need to be assessed in conjunction with the actual impact of weather. Q: Why didn't the weakening of crude oil immediately drag down palm oil? A: Weak crude oil will reduce the economic viability of palm oil biodiesel demand, but on that day, palm oil was mainly driven by weather premiums, and the negative impact of weak crude oil was temporarily offset. If crude oil continues to weaken and the expectation of production cuts does not strengthen, the forward palm oil futures will face downward pressure on the demand side. Q: What are the most critical indicators to track going forward? A: The core is the actual rainfall impact of El Niño on the Malaysian and Indonesian producing regions, followed by the implementation progress of Indonesia's new exchange rules and Agrinas, the pace of forward-month purchases by major importing countries, and the persistence of the geopolitical premium for crude oil. These variables together determine whether the forward premium can be maintained.