The Bearish Outlook for Palm Oil Futures Amid Weakening Regional Demand and Competitive Pressures

The global vegetable oil market in 2025 is a study in contrasts. Palm oil, once the unrivaled workhorse of the sector, now faces a confluence of structural and cyclical headwinds. From Southeast Asia to Europe, demand is softening as sustainability mandates, shifting consumer preferences, and the rise of substitutes like soybean and sunflower oils erode its dominance. For investors, this is a cautionary tale of how macroeconomic forces and commodity dynamics can reshape markets in just a few years.

Structural Demand Pressures: The Great Shift in Key Markets

The decline in palm oil demand is most pronounced in the European Union, where policy-driven sustainability goals have turned the region into a hostile environment for the commodity. The EU's Deforestation Regulation (EUDR) and Renewable Energy Directive (RED II) have effectively barred palm oil from many biofuel applications, forcing buyers to pivot to soybean and sunflower oils. By 2025, EU palm oil imports had fallen 20% year-on-year, with countries like Spain and Italy cutting consumption by 40% and 28%, respectively. These policies are not just regulatory hurdles—they are a permanent shift in demand patterns.

Meanwhile, Southeast Asia's own policies are creating paradoxes. Indonesia's B40 biodiesel mandate, which requires 40% palm oil in diesel fuel, has redirected 1.2 million metric tons of crude palm oil (CPO) from exports to domestic use. While this strengthens the case for palm oil in the short term, it also tightens global supply and elevates prices, making the commodity less competitive against alternatives. Malaysia, meanwhile, is struggling to regain market share with a weaker ringgit and lower export taxes, but production bottlenecks—labor shortages and delayed replanting—threaten to undermine these efforts.

India and China, two of the world's largest importers, are also recalibrating their demand. India's imports dipped 13.2% in March 2025 due to a narrowing price gap with soybean oil, while China's 5% year-on-year decline in palm oil imports reflects a growing preference for domestically produced soybean oil and sunflower oil. These trends are not temporary—they are part of a broader global shift toward localized sourcing and sustainability.

Competitive Dynamics: The Rise of Soybean and Sunflower Oils

Palm oil's decline is not merely a story of waning demand but also of rising competition. Soybean oil, in particular, has surged in prominence. In 2025, U.S. soybean oil futures hit multi-year highs, driven by robust crush margins and limited production bottlenecks. By contrast, Malaysian palm oil futures fell below MYR 4,250 per tonne in July 2025, a four-week low. This divergence highlights a critical shift: soybean oil is now a more attractive feedstock for biodiesel and industrial applications in key markets.

Sunflower oil, too, is capitalizing on palm oil's vulnerabilities. Black Sea trade disruptions—spurred by the ongoing war in Ukraine—have created a supply shortage, pushing prices upward and making sunflower oil a viable alternative in Europe. The EU's soybean meal imports, for instance, hit a decade high in Q1 2025, while sunflower oil's market share in the region grew alongside rapeseed oil.

The Dalian-Chicago convergence further underscores this competitive dynamic. By 2025, the correlation between Dalian palm olein and Chicago soyoil futures had strengthened, reflecting the globalization of edible oil trade and the substitutability of oils in food and biofuel applications. While short-term price divergences persist—such as the June 2025 rally in Dalian palm olein (up 1.07%) versus Chicago soyoil (up 0.59%)—the long-term trend is clear: palm oil is increasingly seen as a secondary option.

Macroeconomic Headwinds: The Invisible Hand of Global Forces

Beyond policy and competition, macroeconomic forces are amplifying palm oil's bearish outlook. Global GDP growth has slowed, dampening demand for industrial and food-grade oils. Inflation, meanwhile, has squeezed food manufacturers, who are prioritizing cost-effective alternatives. For example, U.S. food industry oil prices rose 152% over two years, pushing buyers toward cheaper substitutes like soybean oil.

Energy prices also play a pivotal role. Palm oil's use in biodiesel is highly sensitive to crude oil prices. A 4% monthly drop in crude oil prices in June 2025 weakened biodiesel economics, reducing palm oil's appeal as a feedstock. While OPEC+ supply cuts have introduced volatility, the long-term outlook for crude oil remains uncertain, casting doubt on palm oil's role in the renewable energy transition.

Investment Implications: Navigating a Shifting Landscape

For investors, the bearish case for palm oil futures is compelling. The confluence of weakening demand, rising substitutes, and macroeconomic headwinds suggests that prices will remain under pressure. Short-term rallies—such as those driven by El Niño-induced supply constraints or policy adjustments in Indonesia—should not obscure the long-term trend.

1. Short Palm Oil Futures: The structural bear case makes palm oil futures an attractive short position, particularly as global supply tightens but demand remains soft.
2. Long Soybean/Sunflower Oil Producers: Companies with exposure to soybean or sunflower oil—such as Archer Daniels Midland (ADM) or Bunge Limited—stand to benefit from palm oil's decline.
3. Biofuel Diversification: Investors in renewable diesel producers (e.g., Neste MY, a major user of used cooking oil) should monitor how palm oil's weakening competitiveness affects feedstock costs.

However, risks remain. A rebound in crude oil prices or a shift in Indonesian policy could temporarily boost palm oil. Yet, these are short-term corrections in a long-term bear market.

Conclusion: The New Normal for Palm Oil

The palm oil market of 2025 is a far cry from its 2010s heyday. What once seemed an inexhaustible commodity is now a victim of its own environmental footprint and the rise of alternatives. For investors, the lesson is clear: adaptability is key in a market where sustainability, policy, and macroeconomic forces can upend decades of trends in a matter of years. The bearish outlook for palm oil futures is not just a forecast—it's a reflection of the world's evolving priorities.