Palm oil prices have surged to their highest level in roughly 20 months, driven by escalating biofuel demand and intensifying output risks linked to a strengthening El Nino weather pattern. On Thursday, Kuala Lumpur palm oil futures rose as much as 0.7% to 4,927 ringgit per metric ton, marking the strongest intraday level since December 2024.

Indonesia, the world's largest palm oil producer, has recently launched an ambitious B50 biofuel blending mandate. This policy is expected to divert a larger share of palm oil toward fuel production, thereby curtailing export availability from the country. Additionally, both Indonesia and Malaysia, the second-largest global producer, have been grappling with dry weather conditions in recent weeks.

Seasonal climate forecasts indicate that 2026 could witness the most powerful El Nino event on record. The El Nino phenomenon is well-known for bringing arid conditions across much of Southeast Asia, which places significant strain on the cultivation of this tropical oil crop. The U.S. Department of Agriculture projects that global palm oil inventories will fall to a nine-year low during the 2026-2027 season.

Recent strikes on infrastructure in the Black Sea region have also substantially slowed agricultural exports from Russia and Ukraine. As both nations are key suppliers of sunflower oil, buyers are pivoting toward alternative vegetable oils, including palm oil, to bridge the supply shortfall.

However, Gnanasekar Thiagarajan, head of trading and hedging strategy at Kaleesuwari Intercontinental Ltd., noted that Thursday's price peak "technically represents a breakout point." Still, he cautioned that several factors, including a firmer ringgit and competitive soybean oil prices, could restrain further upside for palm oil.