Palm Oil Market Volatility: Navigating Oversupply, Currency Swings, and Geopolitical Uncertainty

The global palm oil market in 2025 is a tapestry of contradictions: record production levels coexist with tightening inventories, while geopolitical tensions and currency fluctuations amplify price swings. Investors must now grapple with a sector where oversupply risks clash with resilient demand, and where the interplay of macroeconomic forces and policy shifts creates both headwinds and opportunities.

Oversupply and the Looming El Niño Shadow

Global palm oil output is projected to hit 80.7 million metric tons in the 2025/26 market year, driven by Indonesia's 47.5 million metric tons and Malaysia's 19.5 million metric tons. However, this growth is not without risks. While La Niña conditions have bolstered yields in 2024/25, the potential return of El Niño in 2027 threatens a 2–3% contraction in production. For now, oversupply pressures are mitigated by strong demand from India and China, but the sector remains vulnerable to sudden shifts in climate and policy.

Currency Volatility: The Ringgit's Double-Edged Sword

The Malaysian Ringgit (MYR) has appreciated 11.16% against the USD in 2025, raising concerns about the competitiveness of Malaysian exports. A stronger MYR makes palm oil pricier for dollar-based buyers, while a weaker MYR—such as the 12.5% depreciation in 2023—historically boosted exports by 15–20%. For investors, hedging strategies like MYR/USD forwards are critical. A 5% ringgit depreciation could offset a 3% palm oil price decline, preserving margins for export-focused producers like Sime Darby Plantation (BHD.SG) and IOI Corporation (IOI.SG).

Geopolitical Trade Policies: Biodiesel Mandates and Sustainability Debates

Indonesia's B40 biodiesel mandate—a policy requiring 40% palm oil in diesel fuel—has redirected 1.2 million metric tons of crude palm oil (CPO) to domestic use, tightening global supply. Meanwhile, Malaysia's push for Sustainable Palm Oil (MSPO) certification aims to capture ESG-conscious markets, but the EU's Deforestation Regulation (EUDR) labels Malaysia as a “standard risk,” potentially triggering a 5–10% price correction. Investors should monitor policy shifts in both nations, as they directly influence global supply chains and reputational risks.

India's reduced import tariffs (10% vs. 20% in 2024) have made palm oil more competitive against soybean and sunflower oils, with imports surging to an 11-month high in June 2025. China's biofuel policy adjustments and Q4 fiscal stimulus are expected to drive an 8–10% demand increase in 2025/26. However, these markets remain sensitive to crude oil prices, which correlate with palm oil demand via biodiesel linkages.

Investment Risks and Opportunities

The palm oil sector's volatility demands a hybrid investment approach:
1. Long-Term Positioning: India's National Mission on Edible Oils-Oil Palm (NMEO-OP) aims to boost domestic cultivation, but imports will remain a key driver for years. Positioning in firms like Wilmar International (WIMHF.USA) or Golden Agri-Resources (GAR.SG) offers exposure to this growth.
2. Currency Hedging: Given the MYR's sensitivity, investors should hedge via forwards or currency-linked derivatives. A weaker ringgit could provide undervalued entry points for palm oil futures.
3. Policy Arbitrage: Malaysia's MSPO certification and Indonesia's replanting initiatives present opportunities for firms aligning with ESG trends, though regulatory risks persist.
4. Short-Term Volatility: Tactical rotations between palm and soy oils, based on crude oil cycles, can exploit energy-linked demand spikes.

Conclusion: A Sector in Flux

The palm oil market in 2025 is a high-stakes arena where climate, currency, and policy forces collide. While oversupply concerns linger, demand-side resilience—particularly in biofuels and food applications—offers a counterbalance. Investors who navigate this complexity with agility, hedging currency risks and leveraging policy-driven trends, can position themselves to capitalize on the sector's long-term potential while mitigating short-term volatility.

In a world where palm oil transitions from a regional commodity to a global asset class, strategic positioning is not just an option—it's a necessity.