El Niño and Palm Oil Prices: What Commodity Markets Should Watch in H2 2026 and 2027

Commodity markets face a three-part setup for the second half of 2026 and into 2027: geopolitics and crude oil, El Niño weather risk, and biofuels mandates. Among the affected markets, palm oil stands out as one of the most exposed commodities.

The reason is simple. Palm oil sits at the center of the edible oil complex; Southeast Asia dominates global output, and El Niño tends to disrupt production with a lag. At the same time, biofuel demand, fertilizer supply, and Indonesian export policy add another layer of pressure.

Want to go deeper? Download both presentations from our El Niño and commodity markets webinar with Fastmarkets for the full data, price scenarios, and sourcing implications by commodity.

Why Does El Niño Matter Right Now?

El Niño refers to warmer-than-average Pacific sea surface temperatures. That pattern creates distinct climate conditions across key producing regions, and those conditions often reduce crop output.

The current market already shows the setup for increased weather risk. The risk profile rises into the second half of 2027, and the biggest exposure sits in perennial crops: palm oil in Indonesia and Malaysia; coffee in Southeast Asia, Brazil, and South America; and cocoa in Côte d'Ivoire, where drought stress and higher wet risk both matter.

For palm oil specifically, the market faces a clear expression of drought risk because Indonesia and Malaysia account for nearly 90% of global palm production.

Why Is Palm Oil More Exposed Than Other Crops?

Palm oil reacts more strongly to El Niño than many other crops for several reasons.

Palm trees carry long production cycles. Palm is a perennial crop. Once planted, it produces for roughly 24 years. That creates a very different risk profile from seasonal oils such as soybean oil, sunflower oil, and canola. When El Niño hits, palm trees do not adjust quickly. They remember drought, and the impact on yields often shows up 6 to 12 months after the peak weather shock, with effects that can persist longer depending on severity.

Water stress changes flowering and fruit development. El Niño brings lower rainfall, higher temperatures, and lower moisture content in the air. When rainfall stays too low, the tree conserves energy, female flower production falls, pollination weakens, and oil content in the fruit declines. That imbalance can continue for 2 to 3 years in severe cases.

Palm oil sets the floor for edible oil prices. Palm oil remains the cheapest and most competitive edible oil, helping set the floor for the wider edible oil market. Four oils dominate 88% of global edible oil consumption: palm, soybean, rapeseed, and sunflower. A palm oil supply shock can ripple across the entire vegetable oil complex.

The energy transition increases palm's importance. Many countries now use biofuels to move away from fossil fuels, and crude palm oil serves as a feedstock for biodiesel in Malaysia, Indonesia, Colombia, and Thailand. Any supply shock in palm oil also affects biodiesel mandates and the broader energy transition story.

What Other Forces Are Shaping the Palm Oil Outlook?

El Niño does not act alone. Three more forces shape the palm oil outlook for 2026 and 2027.

Geopolitics and crude oil. The Middle East conflict and the risk around the Strait of Hormuz remain a major variable. Oil prices influence veg oil prices, fertilizer costs affect crop yields, and ongoing conflict keeps the market unsettled.

Biofuel mandates. Biofuels provide structural support for palm oil prices. Indonesia's B50 mandate stands out as a major demand driver, with the outlook pointing to 16 million tonnes of CPO used for biodiesel in Indonesia, removing that volume from the export market and supporting prices.

Fertilizer supply. Fertilizer remains a serious constraint, especially for smallholders, who buy and use it within the same year, while large plantations often purchase a year in advance. If the Strait of Hormuz remains blocked or supply does not normalize, plantations face a difficult question heading into 2027: how do they secure fertilizer and maintain production?

What Are Current Palm Oil Prices Telling Us?

Palm oil prices currently trade a bit above soybean oil, but the market still focuses more on good near-term supply than on the weather premium from El Niño. That makes sense in the short run. June output looks promising, August through October form the peak production season, and inventories are rising slowly.

Still, the broader setup remains constructive. Prices tend to rise 20% to 40% about six months after El Niño, once production losses become visible.

What Do Historical El Niño Cycles Tell Us About What's Coming?

Historical cycles show how sensitive palm production can become. The 2015/2016 El Niño led to a drop of 2.4 million tonnes in Malaysian production alone. Earlier episodes from 1989 to 1992 produced flat or declining output, and 1998 saw a production drop of 750,000 tonnes. Malaysia matters here because its supply and demand data is highly trusted by the market. It produces around 20 million tonnes annually versus Indonesia's roughly 50 million tonnes.

What Does the 2026 to 2027 Outlook Point To?

The combination of El Niño risk, biofuel demand, fertilizer pressure, and geopolitical tension points to a more bullish palm oil setup. On the production side, the outlook points to lower Malaysian production by about 300,000 tonnes in 2026, output falling below 20 million tonnes in Malaysia in 2027 (around 19 million tonnes in a weaker scenario), and combined losses across Malaysia and Indonesia of roughly half a million tonnes this year.

On price, the market can move into several ranges depending on how these forces play out:

• 4,000 to 4,800 ringgit per tonne in a moderate scenario

• Around 4,500 ringgit per tonne in the current market zone

• Around 5,000 ringgit or higher in a severe escalation scenario

• Closer to 15,000 ringgit in an extreme weather and market-risk environment if all factors align tightly

The Bottom Line

Palm oil enters 2026 and 2027 with a fragile balance. Near-term supply looks acceptable, but the medium-term weather and policy setup point to tighter production and firmer prices. El Niño, biodiesel demand, fertilizer supply, and crude oil all matter, but palm oil faces the clearest climate exposure in the entire veg oil complex. The market may not fully price that risk yet.