Malaysian palm oil futures extended gains for a third straight session on Wednesday, driven by an overnight rally in soybean oil prices, an advancing B50 biodiesel program in Indonesia and potential output cuts due to the El Nino weather phenomenon.
The Bursa Malaysia Derivatives' May crude palm oil contract gained 0.87% to 4,530 Malaysian ringgit ($1,145.82) per metric ton. The June contract was up 0.95% to 4,578 ringgit/mt.
The effect of higher crude oil prices in the previous session trickled down to edible oils, boosting soybean oil and palm oil, which are both used as biofuel feedstock.
In Indonesia, use of palm-oil based biodiesel will be expanded by implementing a higher blending ratio of 50%, versus the current 40%, beginning July 1.
Preliminary results of B50 testing showed that the fuel was meeting the required specifications, local news agency Antara reported, citing Energy and Mineral Resources Ministry Director General Eniya Listiani Dewi.
Road tests and engine inspections for the transportation sector are expected to be completed by June.
Indonesia's imports of conventional diesel will reportedly discontinue with the B50 implementation, reducing fossil fuel consumption by about 4 million kiloliters per year. The current B40 program has curbed diesel purchases by 3.3 million kiloliters, according to Dewi.
Higher biofuel demand in Indonesia will reduce exportable supplies of palm oil, potentially boosting Malaysia's export market.
Cargo surveyors reportedly estimated a 25.6% to 25.8% month-over-month drop in Malaysian shipments for the first 20 days of April.
In the first half of April, exports fell from a month earlier by 324,724 metric tons to 580,018 mt, primarily due to a 114,650 mt decline in shipments to the Middle East, according to an analysis by price reporting agency Fastmarkets.
The ongoing geopolitical tension has weighed on Malaysia's export market, particularly with a weakening demand from Iran, The Edge Malaysia reported, citing Malaysia External Trade Development Corp. chairman Reezal Merican Naina Merican.
Merican reportedly said that shipments of palm oil and palm-based products to Iran slumped 86.1% year over year to 90 million ringgit in Q1.
Iran did not import any palm oil from Malaysia in the first half of April, according to Fastmarkets.
Going forward, palm oil price movements will be driven by developments in the energy market and supply fundamentals, according to BMI Research, as cited by Business Today.
While production may rise following a seasonal low, El Nino conditions emerging between May and October pose a key upside risk.
BMI reportedly projects palm oil prices to ease to around 4,200 ringgit/mt in Q2, assuming de-escalation in the Middle East conflict, and it expects prices to average at 4,300 ringgit/mt for the year.