On Tuesday (October 13), the benchmark December palm oil contract on the Malaysian Derivatives Exchange closed at 4,682 ringgit per tonne, up 45 ringgit from the previous trading day, a gain of 0.97%, marking the highest closing price since September 24, equivalent to approximately US$1,146.43 per tonne. The contract initially declined, but buying interest reversed the morning's weakness. The backdrop was a record high in Malaysian inventories in September, but traders were more concerned about tightening supply in 2027 and expanding demand for biodiesel in Indonesia, with forward supply risks temporarily outweighing the pressure of current inventory accumulation.

<h2>Malaysian inventories hit record high; negative news already priced in</h2>

Data from the Malaysian Palm Oil Board shows that palm oil stocks surged to 3.51 million tons in September, with production also hitting a record high, exceeding market expectations. Cheang Kang Wei, an agricultural analyst at StoneX in Singapore, stated that the bearish inventory levels in September were already reflected in the market, as prices weakened before and after the release of the Malaysian Palm Oil Board data. He believes the key question now is whether stocks will continue to rise in October; while stocks may remain high, the rate of accumulation should begin to slow.

Cheang added that if exports remain above 1.5 million tons while production stabilizes at around 2 million tons, inventory growth should begin to slow from November. However, if demand disappoints and production remains near record levels, inventories could remain above 3.5 million tons for longer, continuing to suppress prices. This condition implies that the current market is not ignoring high inventories, but rather trading on the expectation that inventory growth may have peaked. If subsequent exports or production deviate from this path, the downward pressure will return to the near-month contract.

<h2>Strong exports, B50 and El Niño come into trading focus</h2>

Shipping survey agencies estimate that Malaysian palm oil product exports increased by 33.5% to 37.7% month-on-month from October 1st to 10th. This increase directly supported the market and partially alleviated the pressure from record-high inventories in September. Cheang stated that the market is increasingly focusing not only on current inventories but also on potential supply risks in 2027, including the lagged effects of El Niño and Indonesia's increased biodiesel demand under the B50 framework. In other words, recent export improvements provide real support, while long-term supply and policy demand provide an expected premium. If the B50 framework is implemented smoothly, Indonesian domestic consumption will divert some export supply; if El Niño has a substantial impact on 2027 production, the global palm oil balance sheet may tighten. However, these factors remain long-term variables, and short-term prices still need to be validated by inventory and export data.

<h2>Competitive oils and crude oil create constraints</h2>

Crude oil weakened as traders assessed Saudi supply risks while weighing the prospect of additional Russian diesel supplies. The decline in crude oil prices reduced the attractiveness of palm oil as a biodiesel feedstock, thus restraining biodiesel demand. In competing edible oils, the most active soybean oil contract on the Dalian Commodity Exchange fell 0.65%, while palm oil contracts fell 0.77%; soybean oil on the Chicago Board of Trade rose 0.55%. Palm oil competes with other edible oils for global vegetable oil market share, and therefore its price action continues to track related edible oils. In terms of exchange rates, 1 US dollar = 4.0840 Malaysian Ringgit. The divergence between crude oil and competing edible oils explains why palm oil has failed to sustain its upward trend despite support from export and forward supply factors.

<h2>Market Outlook</h2>

Next, the market will focus on verifying three things: whether exports can remain above 1.5 million tons in October; whether inventory growth slows as Cheang predicted; and the details of Indonesia's B50 policy implementation and the development of El Niño. If exports continue to grow at double-digit rates while production no longer breaks records, the inventory inflection point may be brought forward, and the focus of trading will continue to shift towards a tight balance in 2027. If demand falls short of expectations and production remains high, inventories above 3.5 million tons will again put downward pressure on near-month contracts. The current main theme is the tug-of-war between current high inventories and long-term supply risks, and prices will remain highly sensitive to export, production, and policy signals.

<h2>[Frequently Asked Questions]</h2>

1. Why did palm oil prices initially fall before rising on October 13th?

The market was pressured by record September inventories in early trading, but then turned to supply risks in 2027, demand from Indonesia's B50, and strong exports in early October, which helped the market recover its losses and close at a two-week high.

2. Has the negative impact of the 3.51 million tons of inventory in September been fully priced in?

StoneX believes that the market weakened before and after the data release, and the short-selling inventory has been largely digested. However, whether inventory can continue to accumulate in October remains the key, and inventory may still be high.

3. How important is export growth?

Exports from October 1st to 10th increased by 33.5% to 37.7% month-on-month. If the total monthly output remains above 1.5 million tons, coupled with stable production at around 2 million tons, the rate of inventory accumulation may slow down starting in November.

4. What long-term factors support prices?

The lingering effects of El Niño could threaten 2027 production, while Indonesia's B50 could increase domestic biodiesel demand or reduce export supply, both of which constitute a long-term risk premium.

5. Why didn't the drop in crude oil prices crush palm oil?

The weakness in crude oil prices has diminished the attractiveness of palm oil as a feedstock for biodiesel, but the current main theme is the improvement in long-term supply and exports, and the differentiation among competing oils, which limits the decline.