Global Palm Oil Market Dynamics in Q3 2025: A Bearish Convergence of Supply, Demand, and Currency Pressures

The global palm oil market in Q3 2025 is a study in contrasts. While robust biofuel demand and festive season consumption in Asia have provided short-term price support, a deeper analysis reveals a structural bearish outlook driven by inter-market correlations, oversupply risks, and currency-driven export competitiveness. For commodity investors, this convergence of factors presents both hedging opportunities and potential shorting strategies, but also carries significant downside risks.

Inter-Market Correlations: Weakening Rivals and Price Differentials

Palm oil's price resilience in Q3 2025 has been underpinned by a widening gap with competing oils. While crude palm oil (CPO) traded at a discount to soybean oil on global cash markets, this differential has created a substitution effect. The U.S. soybean oil futures market hit multi-year highs in July 2025, driven by strong crush margins and limited U.S. production bottlenecks. Meanwhile, Malaysian palm oil futures dipped below MYR 4,250 per tonne in early July, marking a four-week decline.

The cross-commodity linkages extend beyond soybean oil. Canadian canola oil, bolstered by U.S. renewable diesel demand, has also risen in tandem with palm oil prices. However, this interplay is not without risks. As global soybean and sunflower oil surpluses persist—partly due to Black Sea trade disruptions—palm oil's cost advantage is narrowing, reducing its appeal in markets like Europe and the U.S.

Structural Supply-Demand Imbalances: Output Rises, but Demand Falters

Production forecasts for 2025–26 suggest a modest 0.5% increase in global palm oil output to 80.34 million metric tons, driven by Indonesia and Malaysia. Yet, this growth is outpaced by rising inventory levels. Malaysia's palm oil stocks hit 2.03 million metric tons in June 2025—the highest in 18 months—while Indonesia's domestic consumption, fueled by its B40 biodiesel mandate, has diverted 1.2 million metric tons from exports.

The structural imbalance is further exacerbated by weak demand from traditional buyers. China's imports, a key barometer for global demand, have softened due to economic slowdowns and reduced biofuel blending incentives. Similarly, the European Union's shift toward sunflower and soybean oils, driven by sustainability concerns, has eroded palm oil's market share.

Currency Fluctuations: A Double-Edged Sword

Currency dynamics have played a pivotal role in shaping palm oil's competitive positioning. A weaker Malaysian ringgit and Indonesian rupiah have enhanced export competitiveness, but these gains are offset by falling global crude oil prices, which dampen biodiesel demand. The U.S. dollar's strength against the euro and yuan has also made palm oil more expensive for European and Chinese buyers, further pressuring demand.

For example, the rupiah's depreciation to 15,500/USD in July 2025 made Indonesian palm oil 8–10% cheaper for European buyers compared to soybean oil. However, this advantage is temporary, as higher global crude oil prices in Q4 2025 could reverse the POGO (Palm Oil-Gas Oil) spread and weaken biofuel demand.

Investment Implications: Hedging and Shorting Opportunities

The bearish fundamentals in Q3 2025 suggest that commodity investors should prioritize risk management. For those with long positions in palm oil-linked equities (e.g., Sime Darby Plantation, Wilmar International), hedging via futures contracts or currency derivatives is advisable. The KLCE's July 2025 contract has formed a support zone at 760–770 EUR/t, but a breakdown below this level could signal further losses.

Shorting opportunities exist for traders willing to bet on oversupply. Malaysian palm oil inventories are expected to rise to 2.1 million metric tons by September 2025, with exports projected to decline 4% year-on-year. However, short sellers should remain cautious about near-term demand spikes ahead of Diwali in India and China's Q4 fiscal stimulus.

Downside Risks and Policy Uncertainty

While the bearish outlook is compelling, investors must monitor three key risks:
1. Weather Disruptions: El Niño-induced dryness in Indonesia and Malaysia could reduce yields, tightening supply.
2. Policy Shifts: A potential extension of U.S.-China trade agreements or India's edible oil import policies could boost demand.
3. Geopolitical Tensions: Escalation in the Red Sea shipping crisis could disrupt palm oil exports and drive up freight costs.

Conclusion

The global palm oil market in Q3 2025 is a textbook case of structural bearishness. Weakening rival oils, rising production, and currency-driven export dynamics are converging to create a fragile equilibrium. For investors, the path forward requires a disciplined approach—hedging long positions, exploiting short-term volatility, and closely monitoring policy and weather risks. As the market heads into Q4, the key will be balancing near-term demand catalysts with the long-term oversupply overhang.