PETALING JAYA: The bearish fundamentals of the palm oil sector are expected to ease in the final quarter of the year, as the production cycle falls supported by the rise in exports to offset the build-up in inventory levels ahead of a rebound in 2027.
Malaysia’s palm oil stockpiles expanded by 3.2% month-on-month (m-o-m) to hit an all-time high of 3.62 million tonnes in October, up some 44.4% year-on-year (y-o-y).
The El Nino weather phenomenon appears to have little impact on upstream oil palm activities so far as the record stock accumulation was driven by record crude palm oil (CPO) production of 2.15 million tonnes (1.7% m-o-m rise), led by output gains in Sabah, data from the Malaysian Palm oil Board showed.
The m-o-m growth in output, Phillip Capital Research noted, however, reflected a slower pace of growth as output typically approaches its end-of-season peak towards October.
Malaysia’s CPO production year-to-date reached 16.9 million tonnes, up some 2.3% y-o-y, boosted by the higher output in the third quarter (3Q26).
“We expect production to moderate in November-December, as fresh fruit bunch (FFB) yields typically decline towards year-end following the peak production season, with the extent of the decline in the coming months depending on harvesting conditions and weather patterns.
“We believe a more pronounced production decline towards December should help ease the supply overhang, although its impact on inventory normalisation will depend on export demand,” the research house stated .
On the bright side, the inventory data came in less bearish than consensus expectations of 3.75 to 3.76 million tonnes.
A 55.7% m-o-m rebound in exports of palm oil to 1.71 million tonnes – spurred by festive restocking in India ahead of Diwali and lower prices – helped cushion the supply surge, data noted.
Average local delivery CPO prices eased 4.5% m-o-m to about RM4,405 per tonne during the month. Brokerage consensus is for Malaysian stockpiles to peak in November at between 3.6 million and 3.8 million tonnes before commencing a sustained drawdown from December and into 1Q27.
Even though the demand supply balance may be bearish, most brokerages like UOB Kay Hian (UOBHK) Research have maintained an “overweight” call on the sector.
Phillip Capital maintains price assumptions at RM4,470 per tonne for 2026 and RM4,500 per tonne for 2027.
Analysts noted El Nino weather disruptions in 2027 could impair palm yields with a lagged effect.
The record inventory level could also normalise by a potential temporary suspension of Malaysia’s 10% CPO export duty which would narrow its RM700 to RM900 per tonne price disadvantage against Indonesia, while ongoing Black Sea vegetable oil disruptions maintain export demand.
Like UOBKH Research, CGS International (CGSI) Research has maintained an “overweight” rating on the plantation sector, viewing current share price weakness as an accumulation window.
Phillip Capital holds a “neutral” stance due to elevated operating costs and constrained short-term upside.
SD Guthrie Bhd
is the unanimous top pick across all three brokerages.
Phillip Capital has a “buy” call on the integrated planter with a target price (TP) of RM7.73 per share while CGSI Research has an “add” recommendation with a TP of RM9.20. UOBKH Research kept its “buy” call on the stock with a TP of RM8.30 per share.
There were also “buy” calls on IOI Corp Bhd due to expectations of improving yield profiles and strong downstream margins. CGSI Research has a TP of RM6.30 per share on the stock while UOBKH Research has a TP of RM5.50.
CGSI Research also has “buy” recommendations on Kuala Lumpur Kepong Bhd (TP: RM30.90) and Genting Plantations Bhd (TP: RM8.30).
