Palm Oil Market Volatility: Navigating Soy Oil Weakness and Export Dynamics for Contrarian Gains

The global edible oil market is in a state of flux, with palm oil and soybean oil dynamics creating both headwinds and opportunities for investors. As we enter July 2025, the price relationship between these two commodities has become a critical focal point. Palm oil is trading at a $50/tonne discount to soybean oil in India, a gap that has driven a 84% surge in palm oil imports in May 2025 alone. This arbitrage is a structural tailwind for palm oil producers, but it also masks underlying short-term bearish pressures that savvy contrarians must navigate.

The Soy Oil Weakness: A Double-Edged Sword

Soybean oil prices, while showing resilience in Q1 2025, have since cooled due to oversupply from Brazil and reduced demand for biodiesel as crude oil prices dip. The U.S. dollar's strength and competition from sunflower oil have further eroded soybean oil's appeal. For palm oil, this is a blessing in disguise. The $50/tonne discount has made palm oil an attractive alternative for buyers in India, the EU, and China, where trade policies and currency depreciation (e.g., the ringgit's 3.5% decline against the USD) are amplifying its competitiveness.

However, this weakness in soy oil is a double-edged sword. While it boosts palm oil demand, it also signals broader macroeconomic fragility. Investors must watch for signs of a commodity supercycle reversal, particularly if crude oil prices collapse further.

Export Data: A Tale of Two Producers

Malaysia and Indonesia are the twin engines of the palm oil market, and their export trajectories tell a compelling story. In June 2025, Malaysia's palm oil exports rose 4.3% month-on-month to 1.69 million tonnes, driven by India's duty cuts and the EU's renewed interest in sustainable biodiesel. Meanwhile, Indonesia's inventories have plummeted to a 2-year low of 1.8 million tonnes, a direct result of its B40 biodiesel mandate, which consumes 1.2 million tonnes monthly.

Yet, these gains come with caveats. Malaysian inventories are rising—hitting 1.99 million tonnes in May—the highest in eight months. This raises the risk of a price correction if exports fail to keep pace with production. Indonesia's export levy hike to 10% has also created a pricing headwind, potentially reducing CPO exports by 2 million tonnes.

Short-Term Bearish Pressures: What to Watch

The market is currently testing key technical levels. Malaysian palm oil futures (BMD FCPO) are trading at 4,030 MYR/tonne, a critical inflection point. A breakdown below this level could trigger a test of the 3,900 MYR/tonne support, while a breakout above 4,175–4,180 MYR/tonne would signal a bullish reversal. The risk of oversupply looms large, particularly if Malaysian stocks cross the 2 million tonne threshold.

Geopolitical tensions add another layer of volatility. The Iran-Israel conflict has spiked shipping insurance costs, indirectly affecting palm oil logistics. Meanwhile, the Strait of Hormuz remains a wildcard—any disruption here could spike crude prices and indirectly boost biodiesel demand.

Contrarian Entry Points: The Case for Palm Oil

For investors willing to bet against the short-term bearish narrative, the current price of 4,030 MYR/tonne offers a compelling entry. Here's why:
1. Structural Demand: India's duty cuts and Q3 festival demand are tailwinds. Indonesia's B40 mandate will consume 2 million tonnes annually, diverting supply from global markets.
2. Technical Setup: Institutional buying pressure is evident in the 4,145–4,150 MYR/tonne range, suggesting strong bullish momentum. A close above 4,175 MYR/tonne could propel prices toward 4,203 MYR/tonne.
3. Currency Tailwinds: The ringgit's depreciation enhances export competitiveness, particularly for dollar-denominated buyers.

However, caution is warranted. Investors should size positions carefully and use stop-loss orders below 3,900 MYR/tonne to mitigate the risk of a supply-driven collapse.

Final Takeaway

The palm oil market is a masterclass in supply-demand imbalances and policy-driven volatility. While short-term bearish pressures exist—oversupply, geopolitical risks, and soy oil weakness—the structural demand from India, Indonesia's B40 mandate, and Malaysia's production discipline create a compelling long-term case. For contrarians, the current price level is a strategic entry point, provided they're prepared to weather near-term turbulence.

In the end, this is a market where patience and precision pay off. The key is to buy the dip, not the peak—because in a world of shrinking palm oil stocks and rising biodiesel mandates, the fundamentals are screaming, “This is your moment.”