Malaysian palm oil stocks have reached a 19-month low in December, as output drops and exports remain robust. The decline in production, driven by heavy rainfall and other factors, has led to a decrease in inventory levels, supporting benchmark futures and presenting potential implications for investors in the palm oil sector.



Production Decline and Inventory Drop

Malaysia's palm oil stocks shrank by 6.32% in October, the most significant drop in seven months, as production fell and exports surged. The decline in inventory could support the rally in benchmark futures, which were already near their highest levels in more than two years. The Malaysian Palm Oil Board (MPOB) reported that crude palm oil production was down 1.35% at 1.80 million tons, while palm oil exports climbed 11.07% to 1.73 million tonnes (MPOB, 2024).

Export Surge and Domestic Consumption Increase

Despite the production decline, exports have surged, indicating that the industry is still able to meet global demand. In October 2024, palm oil exports climbed by 11.07% to 1.73 million tonnes (MPOB, 2024). This increase in exports indicates that the industry is still robust, despite the production challenges. Additionally, domestic palm oil consumption jumped by 50% to 208,418 tons from the previous month, suggesting that the industry is still strong, despite the production challenges (MPOB, 2024).

Price Impact and Analysts' Forecasts

The decrease in production has also impacted palm oil prices. In November 2024, the CPO spot price surged to RM5,060.50 per tonne, up 36% from the end of December 2023 (The Edge Malaysia, 2024). This price increase reflects the tight supply and strong demand for palm oil. Analysts have revised their CPO price forecasts upwards due to the production decline. CIMB Research raised its average CPO price forecast to RM4,150 per tonne for 2024 and RM4,200 per tonne for 2025 (The Edge Malaysia, 2024). UOB Kay Hian Research anticipates the CPO spot price to trade between RM4,500 and RM5,000 per tonne for the remaining months of 2024 and into the first quarter of 2025 (The Edge Malaysia, 2024).

Potential Implications for Investors

The trend of increasing palm oil prices and tightening supply is expected to continue in 2025, presenting potential implications for investors in the palm oil sector. AmInvestment Bank has upgraded the palm oil sector to "overweight" and expects crude palm oil (CPO) prices to average 6.3% higher in 2025. This is due to shortages of palm oil and competing rapeseed and sunflower oils, as well as growing biodiesel use and restrictions that will curb Indonesia's exports (Source: The Edge Malaysia, Nov 5). Investors can expect higher earnings for Malaysian planters, potential value-unlocking opportunities, stronger-than-expected results, and strategic picks, such as Kuala Lumpur Kepong Bhd (KL:KLK), SD Guthrie Bhd, and Hap Seng Plantations Holdings Bhd.

However, investors should also be aware of potential risks, such as weather-related production surprises, and make informed decisions based on their risk tolerance and investment goals. The palm oil sector remains a volatile and dynamic market, with both opportunities and challenges for investors.

In conclusion, the decline in Malaysian palm oil stocks and production has led to a decrease in inventory levels, supporting benchmark futures and presenting potential implications for investors in the palm oil sector. The trend of increasing palm oil prices and tightening supply is expected to continue in 2025, offering opportunities for investors to capitalize on higher earnings, value-unlocking opportunities, and strategic picks. However, investors should remain vigilant and consider the potential risks associated with the volatile and dynamic palm oil market.