Palm Oil Prices Plunge: Navigating the Supply-Demand Quagmire in 2025

The Malaysian palm oil market has entered a precarious phase, with soaring stockpiles and falling prices signaling a deepening imbalance between supply and demand. As of June 2025, inventories hit 2.03 million metric tons—the highest in 18 months—while prices slumped to near seven-month lows. For commodity traders, this is a moment of both risk and opportunity. Let's dissect the data and its implications.

The Supply-Side Surge

The latest MPOB report reveals a stark reality: palm oil inventories have risen for four consecutive months, driven by two key factors. First, domestic consumption surged by 44% in June, a sharp uptick likely fueled by government initiatives or industrial demand. Second, production—though down 4.48% month-on-month—remains elevated relative to historical trends. The decline in production was unexpected, as replanting efforts and favorable weather had primed expectations for growth.

Meanwhile, processed palm oil stocks jumped 12.19%, suggesting that refiners are stockpiling refined oils ahead of potential export opportunities. This divergence between crude and processed inventories hints at a strategic shift in the industry, but it also underscores the broader oversupply issue.

Demand's Fragile Recovery

Exports, however, tell a different story. June shipments fell 10.52% to 1.26 million tons, missing analyst forecasts by a wide margin. This slump was partly due to port congestion in India, a major buyer, which delayed June shipments. Yet early July data brings cautious optimism: exports rose 12% in the first ten days of the month, aided by Malaysia's decision to lower its July export duty to 8.5% from 9.5%. This reduction, combined with rollover shipments from June, could temporarily ease inventory pressures.

Competing Oils and Global Sentiment

Palm oil's struggles are not isolated. Weakness in rival oils—soybean and sunflower—has created a broader bearish sentiment. Global edible oil prices, particularly in Chicago and Dalian exchanges, have declined, reducing the urgency for buyers to favor palm oil despite its cost advantage. This environment leaves palm oil vulnerable to further declines unless demand surges unexpectedly.

The Bear Case: Why Prices Could Fall Further

Analysts predict palm oil prices could drop to MYR 3,797.34 by Q3 2025 and MYR 3,565.43 by early 2026. Three factors support this outlook:
1. Inventory Overhang: Stockpiles above 2 million tons will persist unless exports jump by 20% or more in coming months—a tall order given seasonal demand patterns.
2. Policy Uncertainty: Malaysia's export duty adjustments are a double-edged sword. While lower duties boost short-term exports, they may accelerate a race to the bottom in pricing, especially if Indonesia follows suit.
3. Production Momentum: The Malaysian Palm Oil Council expects output to grow through September, adding to the surplus unless consumption or exports offset it.

Investment Implications

For traders, the path forward is clear: short-term bearish positioning dominates. Consider:
- Short Palm Oil Futures: With prices already pressured and analysts forecasting further declines, futures contracts could offer gains.
- Monitor Export Data: July's export trends, especially from the 10th onward, will be critical. A sustained rise above 1.4 million tons could stabilize prices, but traders should remain cautious.
- Watch Competitor Oils: If soybean or sunflower oil prices rebound, palm oil's relative value could improve. However, this scenario is unlikely unless global supply chains face new disruptions.

Risks and Caveats

• Weather Risks: Favorable weather in Malaysia and Indonesia is assumed, but droughts or pest outbreaks could disrupt production.
• Policy Shifts: Malaysia or Indonesia might reintroduce export curbs or subsidies, altering the supply-demand equation abruptly.
• Indian Demand: India's palm oil imports hit a six-month high in May, but this could wane if domestic inflation or currency fluctuations hit purchasing power.

Conclusion

The palm oil market is in a supply-induced slump, with prices likely to remain under pressure unless exports or consumption defy expectations. For traders, the data points to a bearish bias, but the sector's volatility demands vigilance. As the old adage goes: In commodities, the cure for low prices is low prices. Only time will tell whether oversupply corrects through reduced production or renewed demand—or if the market enters a prolonged slump.

Stay skeptical, and keep an eye on those export numbers.