Palm Oil Futures: Navigating Geopolitical Crosscurrents and Crude Oil Dynamics

The global palm oil market, a linchpin of the food and energy industries, faces heightened volatility in 2025 as geopolitical tensions and crude oil dynamics reshape its trajectory. From Middle Eastern conflicts to European sustainability mandates, the sector is at a crossroads—where strategic investments could capitalize on structural shifts while mitigating risks.

Geopolitical Crosscurrents: Disruptions and Opportunities

Geopolitical tensions are acting as both a disruptor and enabler for palm oil prices.

1. Middle East Volatility and Freight Costs:
   Ongoing conflicts in the Red Sea and Gulf of Guinea have forced bulk carriers to reroute, increasing ton-mile demand and freight costs. This indirectly supports palm oil prices by raising transportation expenses for rival oils like soybean oil, which rely heavily on transatlantic routes.

A prolonged rerouting scenario could sustain palm oil's price premium unless crude oil prices collapse.

1. Indonesian Export Policies:
   Indonesia's B40 biodiesel mandate, diverting 2 million tons of palm oil annually to domestic use, has tightened global supply. Meanwhile, Jakarta's export levies (peaking at 10%) have made Malaysian producers more competitive. However, Jakarta could reintroduce export bans if domestic shortages arise, as seen in 2022.

2. U.S.-Malaysia Tariffs:
   The U.S. imposed a 25% tariff on Malaysian palm oil in August . While the U.S. accounts for <5% of Malaysia's exports, the move underscores growing Western anti-deforestation sentiment. Malaysia is pivoting to India (imports hit 750,000 MT in June) and Nigeria (a $600 million market), but geopolitical risks persist.

Crude Oil's Role: The POGO Spread and Biodiesel Demand

Crude oil prices remain a linchpin for palm oil futures via the POGO (Palm Oil vs. Gasoil) spread, which measures palm oil's competitiveness as a biodiesel feedstock.

• Bullish Scenario:
  If Brent crude stays above $70/barrel, the POGO spread could narrow to $120/ton, making palm oil economically viable for biodiesel production. This would boost demand and prices to RM4,200/ton by year-end.

• Bearish Scenario:
  A drop below $65/barrel weakens biodiesel economics, reducing palm oil's appeal and pushing prices toward RM3,800/ton.

Regulatory Pressures: The EU Deforestation Regulation (EUDR)

The EU's December 2025 deadline for deforestation-free palm oil imports is a double-edged sword:

• Risks:
  Only 86.5% of Malaysian plantations meet the EU's MSPO 2.0 standards. Non-compliant producers risk losing $500 million in annual EU exports, forcing them to sell at discounts elsewhere.

• Opportunities:
  Certified producers (e.g., those with RSPO certification) could gain market share as buyers like China (now importing 500,000 tons of certified palm oil annually) adopt sustainability mandates.

Investment Implications

1. Hedge with Futures Contracts:
   Investors should consider long positions in palm oil futures (e.g., BMD Crude Palm Oil) if crude oil prices stabilize above $70/barrel and geopolitical risks persist. Monitor the MYR/USD exchange rate—a weaker ringgit (below 4.50 USD/MYR) enhances Malaysian exporters' competitiveness.

2. Focus on Sustainability:
   Back producers with robust ESG credentials, such as IOI Corporation (Malaysia) or Wilmar International, which have invested in RSPO-certified supply chains.

3. Diversify Geographically:
   Invest in Indonesian producers (e.g., PT Astra Agro) if Jakarta's export levies ease, but remain wary of sudden policy shifts.

4. Monitor Crude Oil and Middle East Tensions:
   Track geopolitical developments in the Red Sea and crude oil prices. A spike in freight costs or a crude rally could create short-term buying opportunities.

Conclusion

Palm oil futures are a high-reward, high-risk bet in 2025. Bulls see upside in biodiesel demand and geopolitical-driven freight costs, while bears worry about oversupply (Malaysia's stocks hit a seven-year high of 1.99 million MT) and regulatory hurdles. Investors should adopt a hedged, selective strategy—prioritizing sustainable producers and staying nimble to shifting crude prices and Middle Eastern stability.

Final call: *Go long on certified palm oil producers and futures contracts if crude holds above $70/barrel—otherwise, proceed with caution.