Palm Oil Futures at a Crossroads: Navigating Oil Prices, Currency Shifts, and Policy Risks

The global palm oil market in July 2025 finds itself at a critical inflection point, with prices hovering near seven-month lows amid a volatile mix of geopolitical tensions, crude oil dynamics, and policy changes. For investors, the path forward requires a nuanced understanding of how oil prices, currency movements, and regulatory shifts interplay to shape palm oil futures.

The Crude Oil-Palm Oil Nexus: A Delicate Dance

Palm oil prices remain inextricably linked to crude oil through the POGO (Palm Oil vs. Gasoil) spread, which measures the economic viability of blending palm oil into biodiesel. When crude prices rise, biodiesel becomes more competitive, narrowing the POGO spread and lifting palm oil demand. Conversely, falling crude prices widen the spread, reducing palm oil's appeal as a feedstock.

In recent weeks, Brent crude prices have fluctuated between $65 and $70/barrel, with geopolitical risks—from Houthi attacks in the Red Sea to U.S.-Iran tensions—propping up prices. However, OPEC+'s decision to increase production by 548,000 barrels/day has capped upward momentum. This creates a precarious balance:

Key Takeaway: A sustained crude price rebound above $70/barrel could narrow the POGO spread to $120/ton, potentially lifting palm oil toward RM4,200/ton by year-end. Conversely, a drop below $65/barrel could push prices toward the RM3,800/ton support zone.

Technical and Fundamental Crosscurrents

Palm oil futures are now testing critical technical levels. The RM4,008–4,032/ton range acts as a short-term battleground. A breach below this zone risks a collapse to the 18-month low of RM3,849/ton, while a sustained breakout above RM4,150/ton could signal a resumption of the bull trend.

Fundamentally, Malaysian production stability and strong Indian demand (driven by reduced import duties) provide bullish underpinnings. However, rising inventories in Malaysia and Indonesia's export policies—such as its B40 biodiesel mandate—threaten to overwhelm markets.

Currency: The Ringgit's Double-Edged Sword

The Malaysian Ringgit (MYR) has weakened to 4.52 USD/MYR, making palm oil exports cheaper for dollar-paying buyers like India. This has bolstered demand, but the currency's depreciation comes with risks:

• Exports: A weaker MYR reduces the cost of Malaysian palm oil relative to rivals like soybean oil, favoring short-term price support.
• Debt Costs: Corporate borrowing costs rise as imported inputs (e.g., fertilizers) become pricier, potentially squeezing plantation margins.

Investors should monitor the USD/MYR exchange rate closely. A move above 4.60 could trigger a short squeeze or reverse the currency's impact on palm oil pricing.

Policy Risks: From Jakarta to Brussels

• Indonesia's B40 Mandate: Diverts 2 million tons of palm oil to domestic biodiesel production, reducing global supply. This creates a structural deficit for exporters like Malaysia.
• EU Deforestation Rules: Set to take effect in late 2025, these regulations could disrupt trade flows and raise compliance costs, especially for smallholders.
• Malaysia's Export Policies: The government's stance on export taxes or subsidies could amplify or mitigate volatility.

Investment Strategy: Bulls and Bears Face Off

The coming weeks will hinge on three critical variables:

1. Crude Oil Prices:
2. Bullish Scenario (Crude > $70/barrel): Buy dips near RM4,008/ton, targeting RM4,200–4,500/ton by year-end. Use stop-losses just below key support levels.

3. Bearish Scenario (Crude < $60/barrel): Short positions at RM4,100/ton, aiming for the RM3,849/ton floor.

4. MPOB Report (August 12): Inventories and export data will clarify whether supply/demand balances are tightening or loosening. A surprise drop in Malaysian stocks could spike prices toward RM4,260/ton.

5. Geopolitical Volatility: Monitor Middle East tensions and OPEC+ meetings. A supply disruption (e.g., Iranian attacks on oil tankers) could trigger a crude price spike, indirectly boosting palm oil.

Final Considerations: Patience and Prudence

Palm oil futures are now a high-risk, high-reward trade. Bulls must sustain momentum above RM4,150/ton, while bears await a decisive breakdown below RM4,008/ton. Investors should:
- Hedge with put options to mitigate downside risks.
- Focus on technical signals: A bullish reversal above RM4,260/ton (June highs) would invalidate bearish forecasts.
- Stay attuned to policy shifts: Indonesia's export policies and EU regulations could redefine the market's fundamentals.

In conclusion, July 2025 is a pivotal month for palm oil. With crude prices, currency swings, and policy changes all in play, the path forward demands vigilance, discipline, and a clear-eyed assessment of both technical and fundamental risks.