GLOBAL – Palm oil, the most widely used cooking oil in the world, is facing potential supply disruptions in 2024 due to the recurrence of the El Niño climatic phenomenon.

Thomas Mielke, CEO of Oil World, a leading market analysis company for vegetable oils based in Hamburg, Germany, warned that the unfavourable weather conditions may result in a modest supply growth of 200,000 to 300,000 tonnes in 2023/2024. This represents the lowest annual growth rate in four years.

These predictions of constrained supply were compounded by other factors that are expected to place upward pressure on world palm oil prices.

The disruption is likely to significantly impact the global palm oil market, which is primarily produced and consumed in Asian countries, notably Indonesia and Malaysia,” he said.

“In 2024, the El Niño episode is projected to be one of the main economic factors influencing the global supply of palm oil.”

The climatic phenomenon, which has re-emerged this year after a seven-year hiatus, is anticipated to persist into the following year.

While global demand for vegetable oil is projected to increase by 5.6 million tonnes during the same period, the Indonesian government has announced a shift in biofuel policy, aiming to increase the national biodiesel incorporation target to 35% compared to the previous 30%.

This policy change is intended to reduce diesel imports and promote the use of palm oil for biodiesel production. As a result, palm oil, primarily used for human consumption, is expected to be diverted for biodiesel production, which could impact its availability for export.

As a consequence, global palm oil prices are expected to rise by US$100 over the next 4 to 6 months as supply tightens, according to Thomas Mielke.

Additionally, Dorab Mistry, director of the Indian consumer goods company Godrej International, predicts that Malaysian palm oil prices will trade between 3,700 and 4,500 ringgit ($798-970) per tonne by next June.

Data from FastMarkets revealed that the first four months of 2023 have been challenging for palm oil yields in countries like Malaysia.

Below-average production levels and the lowest output recorded in April since 2006 have kept prices above 3,800 ringgit per tonne, at least in the first quarter of the year.

While May witnessed a positive boost in palm oil production for Malaysia, with the most robust month-over-month growth since March 2020, the transition to El Niño weather patterns might halt this upward trend, reducing production and inventories once again.

Typically, it takes approximately six months for changes in weather patterns, including El Niño, to impact palm oil production.

The 2022-23 season may not face the usual decline associated with the drier outlook implied by El Niño, but the 2023-24 season could witness reduced yields, potentially lowering the final output.

The El Niño event in 2015-16 had a significant impact on palm oil production, causing the average yield to drop to the lowest level in over a decade.

The current higher-than-average precipitation in Malaysia might offer some soil moisture reserves to help palm trees withstand the initial drop in rainfall. However, the average yields have already seen a gradual decline, and a further reduction in 2023-24 could push the average output even lower.