KUALA LUMPUR — Malaysia's crude palm oil (CPO) market entered 2026 with a paradox that has confounded analysts and traders alike: production is near record highs, yet prices remain stubbornly range-bound, caught between the gravitational pull of seven-year-high inventories and the countervailing force of weather risks and biodiesel mandates that could tighten global supply at any moment.
The Malaysian Palm Oil Board (MPOB) reported that December 2025 stocks surged to 3.05 million tonnes, the highest level since February 2019, driven by production that outpaced demand and exports that lagged behind expectations . The stock build-up, which rose 7.6% month-on-month and a staggering 78.5% year-on-year, prompted CIMB to cut its 2026 average CPO price forecast to RM4,000 per tonne from an earlier estimate of RM4,200 .
Yet the market has not collapsed. CPO prices have found a floor around the RM4,000 mark, buoyed by a complex web of supportive factors that analysts say will prevent a sustained downturn. MBSB Research expects prices to average approximately RM4,200 per tonne this year, trading within a RM4,000 to RM4,500 band as the year progresses . BIMB Securities has set its average forecast at RM4,400 per tonne for 2026 and RM4,500 for 2027, citing stronger edible oil demand driven by regional biodiesel mandates and potential supply tightening from emerging El Niño conditions .
The fundamental tension in the market is between near-term oversupply and medium-term supply risks. MPOB projects Malaysia's palm oil production to soften to between 19.5 million and 19.8 million tonnes this year, down from a record 20.3 million tonnes in 2025, as estates enter a biological tree-rest phase following last year's yield rebound . Exports are expected to remain soft at around 15.8 million to 16 million tonnes, as demand from key markets such as India, China, and the European Union remains subdued .
The export weakness is particularly pronounced in the early months of 2026. MPOB data showed that palm oil exports fell 22.48% in February to 1.13 million tonnes from 1.45 million tonnes in January, while palm kernel oil exports shed 17.08% . April exports declined further, dropping 14.34% to 1.30 million tonnes from 1.52 million tonnes a month earlier .
But the bearish narrative is far from monolithic. The emergence of a potential strong El Niño event has injected significant upside risk into the market. The US National Oceanic and Atmospheric Administration has indicated a 63% probability of a strong El Niño emerging between November 2026 and January 2027, with dry conditions potentially beginning as early as July 2026 . During the 2016 El Niño episode, Malaysia's CPO production fell 13.2% year-on-year, a precedent that haunts production forecasts .
CGS International has warned that market expectations for Malaysia's full-year CPO output of between 19.5 million and 20 million tonnes may prove challenging to achieve, identifying monthly production of 1.8 million tonnes in the third quarter as a key benchmark to watch . The firm maintained its "Overweight" rating on the plantation sector, citing continued structural demand support from biodiesel mandates and palm oil's price competitiveness relative to soybean oil .
The biodiesel story is equally consequential. Indonesia's planned implementation of the B50 mandate from July 1 is expected to significantly increase domestic palm oil consumption, diverting a larger share of production toward biodiesel and reducing export availability . Malaysia's own B15 mandate, implemented on June 1, 2026, is projected to strengthen domestic demand incrementally . Hong Leong Investment Bank has raised its CPO price assumptions for 2026 and 2027 by RM100 per tonne to RM4,450 and RM4,300 respectively, reflecting heightened risks from El Niño and Indonesia's biodiesel push .
"Global palm oil market could remain structurally undersupplied should weather risks, fertiliser disruptions and Indonesia's biodiesel policy converge," said HLIB analyst Chye Wen Fei, noting that this could come at a time when Indonesia's higher blending mandate is expected to absorb a larger share of palm oil supply .
The competitive dynamics with soybean oil also favor palm oil at current price levels. CPO has been trading at a discount of approximately US$440 per tonne compared with soybean oil, substantially wider than the historical three- and five-year average discounts of US$190 and US$250 per tonne respectively . This wide discount should continue to encourage substitution toward palm oil among major vegetable oil importers, providing an important buffer despite elevated absolute CPO prices .
RHB Research, which maintained a "neutral" stance on the sector, described 2026 as "a more balanced phase" fundamentally, albeit one still shaped by geopolitics, biofuel policies, and weather risks . The research house noted that CPO prices have already retreated nearly 20% from a peak of RM4,920 per tonne in January 2025 to around RM3,900 to RM4,000 per tonne recently, weighed down by elevated inventories and weaker export demand .
Looking ahead, the market's trajectory will depend on several critical variables. The timing and severity of El Niño will determine whether production forecasts are met or missed. The pace of Indonesia's B50 implementation will shape regional supply availability. And the recovery of demand from price-sensitive markets like India and China will dictate the speed at which Malaysia's elevated stocks are drawn down.
For now, the consensus appears to be that prices will remain supported but range-bound—a market that rewards the patient and punishes those who bet too heavily on either extreme. MBSB Research has kept a "neutral" stance on the plantation sector, citing limited upside from current price levels and a disconnect between plantation share prices and CPO fundamentals, naming SD Guthrie Bhd as its top pick due to balance sheet strength and lower earnings volatility .
As one analyst put it, the palm oil market in 2026 is not a story of collapse or boom, but of resilience in the face of uncertainty—a commodity that continues to find its footing despite the weight of inventories, the threat of weather, and the shifting sands of global trade policy.