Malaysian Palm Oil Futures: Navigating Volatility in a Sea of Oversupply and Sustainability Pressures

The Malaysian palm oil market in June 2025 finds itself at a crossroads. Prices hover near seven-month lows, pressured by record inventories and a global commodity landscape where competing oils and geopolitical dynamics are reshaping demand. Yet beneath this short-term weakness lies a complex web of structural risks—from aging plantations to climate threats—that could redefine the sector's trajectory over the next decade. For investors, the challenge is clear: how to balance near-term downside risks with long-term scarcity potential?

Short-Term Volatility: Oversupply and the Ringgit's Role

Malaysian palm oil futures have tumbled 12% year-to-date, hitting RM3,970/tonne by mid-June—near the MPOC's projected floor of RM3,900/tonne. The immediate driver is a supply glut. April production surged 21.5% month-on-month to 1.69 million metric tons, while inventories hit a record 1.87 million tons, overwhelming buyers.

This oversupply is exacerbated by currency dynamics. A stronger ringgit (weakening USD/MYR) reduces export competitiveness for dollar-based buyers like India and the EU. If the ringgit drops below 4.50 USD/MYR, prices could rebound MYR 200/ton, but further strengthening risks dampening demand.

Meanwhile, competing oils are adding to the pressure. Dalian soybean oil prices have weakened, squeezing palm oil's advantage in Asian markets. A 0.75% drop in Dalian soyoil on June 26 highlighted this dynamic, while CBOT soyoil gains (up 0.59% the same day) show how swings in this rival commodity can amplify volatility.

Long-Term Demand Drivers: Scarcity Risks and Sustainability Pressures

While the short-term outlook is bearish, long-term structural risks suggest a potential turnaround. Here are the key factors:

1. Aging Plantations and Replanting Delays
   Over 30% of Malaysian plantations are older than 25 years, with Sabah's output declining 10% YoY in Q1 2025 due to labor shortages. Replanting is lagging: only 132,000 hectares were replanted in 2023, far below the 4% annual target. This threatens future supply growth, even as demand from biodiesel and food production grows.

2. Sustainability Compliance
   Malaysia's MSPO certification rate is 86.5%, falling short of the 95% threshold required to meet EU regulations by 2026. Failure to meet this target could exclude Malaysia from the EU's €10 billion palm oil market—a major blow to exporters.

3. Climate Risks
   While El Niño has faded, La Niña conditions in Q3 2025 could boost yields, but a return of El Niño in 2026 might cut output by 10–15%, exacerbating supply constraints.

Geopolitical Risks: Indonesia's B40 Mandate and Export Policies

Indonesia's B40 biodiesel mandate—which requires 40% palm oil in diesel—has siphoned 2 million tons annually of CPO away from global markets. Paradoxically, this reduces oversupply pressures in Malaysia but creates price instability as Jakarta and Kuala Lumpur juggle export taxes and subsidies.

Investment Strategy: Playing the Volatility and Scarcity Narrative

The market's dual dynamics present opportunities for both hedged long positions and strategic shorts:

• Bullish Play
• Trigger: Crude oil prices above $75/barrel (reviving biodiesel demand) or sustained gains in CBOT soybean oil.
• Position: Long futures at RM3,950–RM4,000/ton, targeting RM4,100–RM4,200/ton.

• Hedge: Use put options to protect against downside risks, given Bursa Malaysia's 15% daily price limits.

• Bearish Play

• Trigger: Dalian soyoil below RM5,000/ton or USD/MYR below 4.50.
• Position: Short futures at RM4,100/ton, aiming for RM3,900/ton.

Conclusion: A Volatile Now, a Risky Future

Malaysian palm oil futures are a study in contrasts. Near-term oversupply and currency pressures keep prices under pressure, with a 12-month forecast of RM3,565/ton. But long-term risks—from aging plantations to sustainability mandates—suggest that strategic long positions below RM3,900/ton, paired with hedging, could outperform if structural bottlenecks materialize. Investors must remain nimble, ready to pivot as crude oil prices, biodiesel policies, and climate patterns shift. In this market, patience and hedging are the ultimate currencies.