Indonesia's biodiesel policy and the likely emergence of the El Nino weather pattern could further strain global inventories of the most used cooking oil, lifting prices later this year, leading industry officials and analysts said at a conference.

The market for vegetable oils is set to tighten for a year from mid-2023 as global biodiesel production could rise by around 4.5 million tonnes in 2023, leading industry analyst Thomas Mielke told a palm oil conference in Kuala Lumpur.

Indonesia, the world's biggest producer of palm oil, raised the mandatory blend of palm oil in biodiesel to 35% starting in February, from 30% earlier, to reduce diesel fuel imports amid high global energy prices and to reduce emissions.

"Rising demand and limited growth in (vegetable oil) supplies would bring us into a global production deficit in July to December this year and January to June 2024," said Mielke, who heads Hamburg-based research firm Oil World.

He forecast Malaysian refined bleached deodorized (RBD) palm olein prices could jump nearly 16% to $1,150 per tonne in the second half of 2023.

Malaysian production in 2023 is likely to rise by 600,000 tonnes to 19 million tonnes, while Indonesian production is seen rising by 1.2 million tonnes to 47.7 million tonnes, he said.

Dorab Mistry, the director of Indian consumer goods company Godrej International, expects Malaysian palm oil to trade between 4,000 and 5,000 ringgit ($1,106) per tonne from now until August.

The benchmark palm oil contract on the Bursa Malaysia Derivatives Exchange slid 24 ringgit to 4,181 ringgit a tonne on Wednesday.

El Nino fears

Leading Malaysian palm oil producers, such as FGV Holdings and United Plantations told Reuters that the El Nino weather pattern, predicted to emerge mid-this year, could reduce production in 2024.

An El Nino episode usually results in below-average rainfall in main palm oil producers Indonesia and Malaysia, cutting yields and pushing up global prices.

Malaysia and Indonesia are already grappling with La Nina-induced wet weather conditions and flooding that have curtailed production in the past few months.

"This is climate change... Mother Nature has put a booster rocket under agricultural prices," Mistry said.

Indonesia, which surprised the market by curbing exports earlier this year, is likely to export less palm oil in 2023 than it did last year because of its biodiesel mandate, said Fadhil Hasan, head of the trade and promotion division at the Indonesian Palm Oil Association.

"It used to be palm oil is export-oriented for Indonesia, but sales are declining and domestic consumption is increasing," Fadhil said.

James Fry, the chairman of commodities consultancy LMC International, however, cautioned that the correction in gasoil prices could bring down demand for biodiesel and pull-down palm oil prices.

Fry said palm oil futures will average 3,760 ringgit ($831.86) a tonne in 2023, down from 4,920 ringgit in 2022, pressured by lower gasoil prices.