Middle East conflict lifts CPO prices but threatens exports

KUCHING (March 12): Escalating tensions in the Middle East are pushing crude palm oil (CPO) prices higher, but analysts caution that the conflict could also disrupt PO trade and increase production costs for the plantation sector.

In a regional sector update, RHB Investment Bank Bhd (RHB Research) said the conflict has created both positive and negative implications for the industry.

On the positive side, rising global oil prices have supported pam oil prices due to strong relationship between the oil and gas (O&G) and vegetable oil markets.

Since the start of the conflict at the end of February, crude oil prices have surged by about 30.7 per cent, while PO prices have risen 11.6 per cent in tandem.

“The correlation between crude oil and CPO has also risen to 0.92-times vs 0.43-times in 2025,” saod the analyst.

This price spike has narrowed the Palm Oil-Gas Oil (POGO) spread to a much lower US$19.95 per bbl from US$52 per bbl at the beginning of 2026,” said the analyst.

RHB Research also added that the price spike of crude oil has also narrowed the Palm Oil-Gas Oil (POGO) spread to a much lower US$19.95 per bbl from US$52 per bbl at the beginning of 2026.

This is beneficial to the plantation sector as the analyst estimates that the lower spread will enable Indonesia to fund its B50 biodiesel mandate that was previously placed on hold.

The B50 biodiesel mandate which would require diesel to contain at least 50 per cent biodiesel of PO origin is expected to take away an additional four million tonnes of PO supply from the global market, increasing support for CPO prices.

Meanwhile, on the negative side, the conflict is expected to affect PO demand as key shipping routes through the Strait of Hormuz face potential disruptions.

RHB Research estimates that countries including Pakistan, Egypt, Saudi Arabia, Turkey, the United Arab Emirates and Iran could be affected, potentially impacting up to 15 per cent of global PO demand if shipping routes are disrupted.

While shipments could be diverted through longer routes, RHB Research said this would likely result in higher freight costs.

“We understand global freight costs have risen to all-time highs, while insurance companies are preparing for the possible activation of ‘notice of cancellation’ provisions in war-risk policies and for sharp spikes in war risk premiums,” RHB Research shared.

But besides just affected PO exports, the Strait of Hormuz’s potential closure or disruption would also affect fertiliser costs as approximately one-third of the world’s fertiliser trade also passes through the waterway.

RHB Research stressed that all these could add significantly to overall costs for planters as fertiliser costs comprise circa 20 to 30 per cent of overall costs while transport and logistic costs comprise of circa 5 to 10 per cent.

Given these implications, RHB said the outlook for the plantation sector remains volatile, with CPO prices likely to remain sensitive to developments in the global energy market and geopolitical tensions.

That said, CPO prices are expected to be supported in the near-term at least as analysts note that recent data from the Malaysian Palm Oil Board (MPOB) is mildly supportive for CPO prices.

In February, Malaysia’s PO inventories declined for a second consecutive month as production fell sharply for the second consecutive month, signalling a gradual easing of the country’s elevated stockpile levels.

According to MPOB, PO inventories fell 3.9 per cent month-on-month (m-o-m) to 2.7 million tonnes in February, the lowest level recorded in four months.

The decline was mainly driven by a steep drop in crude palm oil (CPO) production, which fell by 18.5 per cent m-o-m to about 1.28 million tonnes due to seasonal factors and fewer working days during the month.

Fresh fruit bunch (FFB) yields had weakened across most regions, with Sabah recording the steepest decline, followed by Sarawak and Peninsular Malaysia.

Analysts from TA Securities Holdings Bhd (TA Research) expect production to remain subdued in the first quarter of 2026 (1Q26) due to seasonal patterns before recovering from the second quarter as harvesting conditions improve.

Menwhile, Public Investment Bank Bhd (PublicInvest Research) noted that the production slowdown had outweighed weaker demand from exports and domestic consumptions, resulting in the inventory drop.