PALM oil inventories in Malaysia likely expanded to the largest in four months as yields in the world’s second-biggest grower remained elevated and export demand stayed sluggish.

Stockpiles increased about 11% in June from a month earlier to 1.87 million tons, according to the median of 14 estimates in a Bloomberg survey of analysts, traders and plantation executives. That would put reserves at a level that is about 13% higher than the same period a year earlier. 

Production of crude palm oil declined about 1% to 1.50 million tons, the survey showed, after surging 27% in May.

Exports were seen little changed at 1.08 million tons after falling for two straight months. 

Futures in Kuala Lumpur were flat at 3,882 ringgit a ton by the midday break. Investors are keeping watch on any potential disruption to food crops as El Niño takes hold. The World Meteorological Organization says the onset of the event will “greatly increase” the chance of record-breaking temperatures. 

Still, while other agricultural markets are talking about El Niño and the impact of drought, for palm oil it’s the “demand drought” that’s causing widespread concern, according to Paramalingam Supramaniam, a director at Selangor-based broker Pelindung Bestari. 

“Import parities are negative in both China and India, and margins are super compressed in refining,” he said. “Unless demand picks up first, any rally will succumb to selling pressure.”

Malaysian stockpiles in June will have been driven up by output that’s still strong from a high base in May, said Sathia Varqa, senior analyst at Fast Markets Palm Oil Analytics. Still, exports should rise strongly in July after a lackluster performance in May and June, Varqa said. — Bloomberg