Navigating Volatility in Palm Oil Futures Amid U.S. Trade Uncertainty and Biodiesel Demand Shifts

The palm oil market in 2025 is a chessboard of conflicting forces: U.S. policy uncertainty, surging crude oil prices, and divergent global biodiesel mandates. For investors, this volatility is both a warning and an opportunity. Let's dissect the key drivers and what they mean for near-term risk and reward in this critical commodity.

1. U.S. Policy Uncertainty: A Double-Edged Sword

The U.S. Environmental Protection Agency's (EPA) 2025 Renewable Fuel Standard (RFS) mandates 3.35 billion gallons of biomass-based diesel, a policy that could boost palm oil demand by up to 500 million gallons annually. However, the expiration of the Biodiesel Tax Credit (BTC) at the end of 2024 has left the sector in limbo. Producers are racing to maximize output under the existing BTC, but the lack of clarity on its extension—or replacement via the 45Z GHG rules—has created a “wait-and-see” market.

The Biden administration's decision to defer BTC and 45Z decisions to the incoming Trump administration has amplified this uncertainty. Importers are already hedging their bets, with some delaying shipments to the U.S. in 2025. For investors, this means short-term volatility in U.S. biofuel demand, but also a potential rebound if the BTC is renewed or replaced with a more robust incentive structure.

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2. Global Biodiesel Mandates: Asia's Tailwinds vs. Europe's Headwinds

While the U.S. hesitates, Asia is charging ahead. Indonesia's B40 mandate—requiring 40% palm oil in diesel—has already diverted 2 million metric tons of crude palm oil (CPO) into domestic fuel use, tightening global supplies. Malaysia is doubling down on export-driven biodiesel strategies, leveraging its competitive production costs. Meanwhile, India's aggressive import policies have pushed palm oil biodiesel consumption to 9.4 million metric tons in 2024–25, with the E20 ethanol blending target adding further demand.

Conversely, Europe's Renewable Energy Directive (RED III) is phasing out palm oil in favor of used cooking oil and soybean oil, reducing its share in biodiesel from 18% to 3% by 2034. This policy divergence creates a structural asymmetry: Asia's mandates are a growth tailwind, while Europe's exit is a drag.

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3. Crude Oil Prices and the POGO Spread: A New Benchmark

Rising crude oil prices—driven by Middle East tensions and a 7% surge in Brent prices—have made biofuels more competitive. The POGO spread (the price of palm oil relative to crude oil) has widened to $165/mt in 2024, up from $39.8/mt in 2023. This metric is now a critical barometer for biodiesel economics.

If crude oil prices rise above $85/bbl, the POGO spread narrows, making palm-based biodiesel more attractive. Conversely, a drop in crude prices could weaken palm oil's appeal—unless Asian mandates offset the decline. For investors, monitoring the POGO spread is essential to gauge the sector's health.

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4. Currency Dynamics: The Hidden Volatility Driver

A stronger Malaysian ringgit (MYR) reduces the competitiveness of palm oil exports, while a weaker MYR temporarily boosts prices by improving affordability for buyers in India and China. For example, a 1.06% MYR depreciation in April 2025 led to a short-term price spike, while a 0.36% appreciation in July 2025 coincided with a 1.2% drop in palm oil futures.

The U.S. dollar's strength also indirectly affects palm oil via soyoil, as a stronger dollar often drives up U.S. soyoil prices on the CME, creating a substitution effect. However, if soyoil prices collapse due to oversupply, palm oil faces downward pressure.

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5. Investment Strategy: Navigating the Asymmetries

The palm oil market is defined by three key asymmetries:
1. Supply Inelasticity: Unlike soybean oil, palm oil cannot be scaled up quickly, making it more sensitive to policy-driven demand.
2. Regional Policy Arbitrage: Europe's exit contrasts with Asia's mandates, creating a fragmented but dynamic demand landscape.
3. Currency Exposure: A weaker MYR can boost export demand but risks squeezing producer margins.

Actionable Steps for Investors:
- Long Positions in Asian Markets: Focus on regions with strong mandates (Indonesia, Malaysia) and robust import policies (India).
- Hedge Currency Swings: Malaysian producers should hedge against MYR volatility to protect margins.
- Monitor POGO and Crude Prices: These metrics will dictate the sector's near-term direction.

Conclusion: A Volatile But Rewarding Landscape

The palm oil sector in 2025 is a high-stakes game of policy, geopolitics, and market fundamentals. While U.S. trade uncertainty and European policy shifts introduce risk, Asia's aggressive biodiesel mandates and crude oil price dynamics create compelling opportunities. For investors willing to navigate the noise, palm oil remains a strategic asset in the green energy transition—and a commodity where volatility is not a barrier, but a feature.

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By aligning with the structural tailwinds in Asia and hedging against currency and policy risks, investors can position themselves to capitalize on the palm oil sector's asymmetric potential in 2025 and beyond.