KONTAN.CO.ID - NUSA DUA, Indonesia, Nov 13 - Palm oil prices are expected to recover in the coming months with the impact of El Niño-induced drought on production expected to materialise in the first quarter of 2027, mainly in top producer Indonesia, leading industry analysts said on Friday.

Malaysian benchmark palm oil prices have fallen sharply in recent weeks, triggered by concerns over rising inventories in Malaysia, the world's second-largest producer, after stockpiles hit a record high in October.

The Malaysian palm oil benchmark contract rose by as much as 24% this year to a peak of 5,018 ringgit ($1,229) per ton in late August, but has since pared its advance to a gain of around 10% for the year.

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Markets had expected palm oil production to be disrupted by the El Niño-related drought, but leading industry analyst Dorab Mistry said traders had been "too bullish too soon" over the severity of the impact, and the earlier run-up in Malaysian prices was premature.

Mistry, director of India's Godrej International, said palm oil production is currently in its high-yield phase despite El Niño, and the phase could last until January.

The production cycle is expected to switch directly to the low-yield phase in February, with overall palm oil production expected to decline by 2.7 million metric tons in 2027, he added.

The Malaysian palm oil benchmark contract is expected to be in the range of 4,500 to 5,000 ringgit ($1,102 to $1,225) per ton until April 2027, Mistry told an industry conference, up from around 4,462 ringgit ($1,093) on Friday.

"Prices have corrected sufficiently to recover as output declines. A full rally is justified once Indonesian output declines more sharply at the end of first quarter 2027," Glenauk Economics analyst Julian McGill told the same conference.

McGill expects palm oil supply to tighten by 4.6 million tons in 2027, including a 2-million-ton decline in Indonesia. He expects prices to approach 5,000 ringgit a ton by mid-2027.

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The energy sector is expected to drive global demand higher as users switch to renewable alternatives amid high oil prices, said Thomas Mielke, executive director of Hamburg-based forecaster Oil World.

This includes Indonesia, which increased its mandatory biodiesel mix to a 50-50 blend of palm-based fuel and conventional diesel, reducing exports, he said.

"We see for the first time Indonesian consumption for palm oil will be higher than exports," Mielke said.

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The Indonesian Palm Oil Association forecast palm oil consumption for biodiesel in 2027 to increase 18% to 17.4 million tons, while expecting lower exports.

Mielke said he expected palm oil production in 2027 to drop by 3.2 million tons due to drought, higher fertiliser costs and insufficient planting in recent years.

"So the stocks, which are huge and (at a) record high in Malaysia, will be used up rather quickly within the next five or six months," he said.

($1 = 4.0820 ringgit)