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Asia Biofuels Update: Palm Oil Rises on Higher Biofuel Demand, Tighter Supply Prospects

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Malaysian palm oil futures extended gains on Monday, driven by stronger biofuel demand sentiment amid rising crude oil prices and a tightening supply outlook due to drought and forest fires in Indonesia.

The Bursa Malaysia Derivatives' October crude palm oil contract closed higher by 0.86% at 4,816 Malaysian ringgit ($1,190.75) per metric ton. The November contract was up 0.99% to 4,978 ringgit/mt.

Renewed tensions in the Strait of Hormuz lifted energy prices, improving the viability of biofuels over fossil fuels.

The market also continued to price in a potential yield reduction from a developing El Nino weather phenomenon.

In Indonesia, hot and dry weather has resulted in forest fires, affecting more than 202,000 hectares of land in Borneo and Sumatra and leading to a hazy atmosphere that disrupts harvesting and threatens fresh fruit bunch production.

The worsening forest fire situation raised supply concerns and lifted palm oil prices, according to Iceberg X trader David Ng, as cited by Bloomberg.

"The market has fully priced in the risk of El Nino-induced drought; institutional warnings regarding potential production losses next year due to extreme weather continued to drive up valuations for long-term contracts," market intelligence provider SunSirs said.

On the demand side, the B50 biodiesel transition in Indonesia boosted long-term demand expectations, but higher palm oil prices compared with rival soybean oil weighed on near-term demand in Malaysia.

Cargo surveyors reportedly estimated Malaysian shipments in August to have dropped between 6.5% and 14.9% from a month earlier.

Going forward, "focus lies on Indonesia's production realization, B50 implementation, and Malaysian palm oil export data," price reporting agency MySteel said.

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