Palm Oil Futures: A Strategic Buy Amid Short-Covering and Biodiesel Demand Surge

In the volatile world of commodities, few assets have demonstrated the resilience and strategic potential of palm oil in 2025. As crude oil prices rebound above $75 per barrel and biodiesel demand surges, palm oil futures have emerged as a compelling investment thesis. This article explores the interlinkages between energy markets, macroeconomic positioning, and policy-driven demand, while also addressing key risks such as inventory levels and soybean oil competition.

The Perfect Storm: Crude Oil, Biodiesel, and Palm Oil

The relationship between crude oil and palm oil has never been more pronounced. In late June 2025, the POGO (palm oil vs. gasoil) spread widened to $165 per metric ton, reflecting a 10% rise in crude oil prices and a 2.04% increase in palm oil futures. This divergence underscores palm oil's growing role as a cost-competitive feedstock for biodiesel. With global crude prices acting as a tailwind, palm oil's economics have shifted decisively in its favor.

Indonesia's B40 mandate—a 40% palm oil blend in diesel fuel—has further amplified demand. By July 2025, the program had already consumed 48% of its annual 15.62 million kiloliter target, absorbing an estimated 2 million metric tonnes of crude palm oil (CPO) domestically. This policy not only reduces export availability but also creates a structural demand floor for palm oil. The government's eye on a B50 mandate by 2026 suggests this trend is far from peaking.

Short-Covering and Technical Momentum: A Catalyst for Rallies

July 2025 has witnessed aggressive short-covering in palm oil futures, driven by production declines in Malaysia (-4.48% in June) and Indonesia (-8%–10%), coupled with India's restocking ahead of Diwali. Malaysian ringgit depreciation (to 4.23 USD/MYR by July 7) and export duty cuts (9% in August from 8.5% in July) have added macroeconomic support.

Technical indicators confirm a pivotal breakout. The October crude palm oil contract on the Bursa Malaysia Derivatives Exchange surged 6.67% to MYR 4,252 per ton by July, breaching the 200-day SMA (MYR 4,050) and testing the 4,150 ringgit resistance level. A sustained close above this threshold could attract institutional buying and shift market sentiment from bearish to bullish.

Macroeconomic Positioning: Currency, Geopolitics, and Policy

The U.S. dollar's depreciation has boosted demand for dollar-denominated palm oil, while geopolitical tensions—such as the Israel-Iran conflict—have elevated insurance and freight premiums, indirectly supporting palm oil's competitiveness against soybean and sunflower oils. Indonesia's export levies and Malaysia's export duty adjustments further tighten supply, reinforcing palm oil's premium in energy markets.

Key Risks: Inventory Levels and Soybean Oil Competition

While the investment case is robust, risks remain. Global palm oil inventories, though tight, are not immune to oversupply. Malaysia's domestic consumption surge (44% in June) and India's port congestion have temporarily distorted export data, but these are short-term headwinds.

Soybean oil remains a key competitor, particularly in North America and Europe. However, elevated palm oil prices have reduced the appeal of alternatives like palm oil mill effluent (POME) and used cooking oil (UCO). In China, where soybean oil prices have faltered, palm oil's substitution potential is limited but growing.

Investment Thesis: Strategic Buy or Caution?

The interplay of short-covering, crude oil tailwinds, and policy-driven demand creates a compelling case for a near-term rally in palm oil futures. If crude prices remain above $75/bbl and the B40 mandate progresses smoothly, prices could test the 4,150–4,300 ringgit range. However, investors must remain vigilant about oversupply risks and the financial burden of Indonesia's subsidies.

For a disciplined approach, consider the following:
1. Entry Points: Use pullbacks to the 200-day SMA (MYR 4,050) as a buying opportunity.
2. Stop-Loss Placement: Protect against a breakdown below 4,150 ringgit.
3. Position Sizing: Allocate 5–10% of a diversified portfolio to mitigate volatility.

Conclusion

Palm oil futures are at a crossroads, driven by energy market dynamics, policy tailwinds, and macroeconomic shifts. While risks like inventory levels and soybean oil competition linger, the structural demand from biodiesel and short-covering momentum present a strong near-term opportunity. For investors with a medium-term horizon, this is a commodity where fundamentals and technicals align—provided they enter with a clear risk management framework.