KUALA LUMPUR: Malaysia's benchmark crude palm oil (CPO) spot prices are likely to weaken to below US$700 (about RM3,098) per tonne by year-end on increasing output after a healthy start in the first three months, Fitch Ratings said.

The spot prices averaged around US$915 per tonne so far in the first quarter, Fitch said.

A hit to sunflower seed oil supply due to the Russia-Ukraine war was a key upside risk to its expectations, the ratings agency said today.

CPO prices since late-2022 have been supported by market expectations of significantly higher biodiesel consumption in and lower exports from Indonesia, and the impact of heavy rainfall at the start of 2023 on output.

However, latest production data from Malaysia and Indonesia indicate that yields are on an uptrend.

Fitch said the shortage of foreign workers in Malaysia was also being addressed at a rapid pace, and was likely to be resolved by the first half of the year (1H23).

"Weather forecasters believe the El Nino weather pattern could develop from 2H23, which would improve output of soybean oil, CPO's key substitute, and pressure global vegetable oil prices.

"El Nino has historically been associated with weak CPO prices, and prices dropped to an average of around US$535/ per tonne in 2018-2019."

Fitch raised its assumption for long-term benchmark CPO prices beyond 2024 to US$650 per tonne, from US$600 per tonne, to account for significant wage-cost inflation for the industry in 2022-2023.