Palm Oil Futures Amid Divergent Vegetable Oil and Crude Oil Dynamics

The global vegetable oil and biofuel markets are undergoing a transformation shaped by divergent forces: structural supply constraints in palm oil, shifting biodiesel mandates, and currency-driven export dynamics. For investors, these factors are creating asymmetric value in palm oil relative to soyoil and crude oil, offering both opportunities and risks.

Structural Shifts in Palm Oil Supply: A Tightening Bottleneck

Global palm oil production in 2024/25 is projected to grow by just 2.3 million metric tons, a far cry from the double-digit expansions of the 2010s. Aging plantations, sustainability transitions, and climate-linked disruptions—such as El Niño-driven droughts in Indonesia and Malaysia—are capping output. Indonesia's B40 biodiesel mandate, implemented in January 2025, has further tightened supply by diverting 40% of domestic crude palm oil (CPO) to energy use. This policy, while gradual, has already reduced exportable surplus, supporting prices even as global demand remains stable.

Meanwhile, logistical bottlenecks—port congestion in Indonesia and labor shortages in Malaysia—are compounding supply-side pressures. These constraints create a unique asymmetry: palm oil's supply elasticity is far lower than soyoil's, which can be more easily substituted with other feedstocks or sourced from the U.S. and Brazil.

Biodiesel Demand: Policy-Driven Divergence

Global biodiesel demand is growing at a modest 0.9% annually, but regional policies are reshaping the competitive landscape. In the EU, sustainability criteria under RED III are phasing out palm oil in favor of used cooking oil and soybean oil, reducing palm's share in European biodiesel from 18% to 3% by 2034. Conversely, in Asia, Indonesia's B40-B50 mandates and Malaysia's export-driven biodiesel strategy are cementing palm oil's dominance.

The POGO spread—the price of palm oil relative to crude oil—has become a critical metric. At mid-2025 levels of $75–80 per barrel for crude, palm-based biodiesel remains marginally competitive. A rise in crude prices above $85/bbl would narrow the spread, boosting palm oil demand. Conversely, a drop in crude prices could weaken palm's appeal, though strong mandates in Asia may offset this.

India's aggressive import policies and export discounts ($50/MT cheaper than soyoil) are also driving demand, with palm oil biodiesel consumption projected to hit 9.4 million metric tons in 2024–25. This contrasts with China's muted demand, where soybean inventories and weak industrial consumption are a drag.

Currency Movements: A Double-Edged Sword

Currency dynamics are amplifying palm oil's export volatility. A stronger Malaysian ringgit (MYR) makes CPO more expensive for buyers in India and China, reducing competitiveness. For example, a 0.36% MYR appreciation in early July 2025 coincided with a 1.2% drop in palm oil futures. Conversely, a weaker MYR (e.g., a 1.06% depreciation in April 2025) temporarily boosted prices by improving export affordability.

The U.S. dollar's strength also indirectly affects palm oil via soyoil. 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. Meanwhile, crude oil's volatility—swinging between $55 and $59/bbl in 2025—adds another layer of uncertainty.

Investment Implications: Navigating the Asymmetry

The interplay of these factors suggests palm oil futures are priced for resilience, but with caveats. For investors, the key asymmetries lie in:
1. Supply Inelasticity: Palm oil's limited ability to scale up quickly makes it more sensitive to policy-driven demand (e.g., B40) than soyoil.
2. Regional Policy Arbitrage: While the EU moves away from palm oil, Asia's mandates create a growth tailwind.
3. Currency Exposure: A weaker MYR could temporarily boost palm oil's export demand but risks squeezing producer margins.

A strategic approach would involve:
- Long palm oil futures with a focus on Asian markets, where mandates and import policies are driving demand.
- Short-term hedging against currency swings, particularly for Malaysian producers.
- Monitoring the POGO spread and crude oil prices, which could trigger sharp rallies or corrections.

In conclusion, palm oil's unique position at the intersection of supply constraints, policy-driven demand, and currency dynamics offers asymmetric value. Investors who navigate these forces with a regional lens and a focus on structural trends—rather than cyclical price swings—may find compelling opportunities in this complex, but evolving, market.