Palm Oil Prices Surge Amid Structural Shortages: Biodiesel Mandates and Currency Plays Fuel Bullish Momentum

The global palm oil market is entering a new era of volatility, driven by a perfect storm of reduced production in top exporters Malaysia and Indonesia, escalating biodiesel mandates, and currency fluctuations. As supply tightens and demand surges, investors are being urged to capitalize on the bullish trend—before a potential correction in early 2026.

Supply Crunch: Reduced Output and Replanting Delays
Malaysia's palm oil production has dipped to 19.2 million metric tons (MT) in the 2024/25 season, a 3.3% decline from the previous year. Severe flooding in early 2025 slashed output by 8.7% in the first two months, pushing domestic stocks to a two-year low of 1.5 million MT. Meanwhile, Indonesia's output, while growing 4.5% to 46.0 million MT, faces internal pressure from its B40 biodiesel mandate. This policy shift is diverting 1.7–2.0 million MT of palm oil annually from exports to domestic use, shrinking global exportable supplies.

The combined effect has created a projected 0.1 million MT global supply deficit for 2024/25—a stark contrast to the 0.6% production growth initially anticipated. Replanting delays exacerbate the issue: Malaysia replanted just 2.3% of its planted area in 2023, below its 4% target, while Indonesia's replanting progress lags behind its 2.5 million-hectare goal. Aging palm trees (over 25 years old) now account for 30% of Malaysia's plantations, further constraining yield growth.

Demand Drivers: Biodiesel and Geopolitical Shifts
The single largest demand driver is the Indonesian B40 mandate, which requires 40% palm oil blending in biodiesel—a 5% increase from B35. This policy alone will consume an additional 2 million MT of palm oil annually, diverting it from global trade. Meanwhile, India's palm oil imports are expected to hit 9.4 million MT in 2025, up 6.8% year-on-year, as palm oil's cost advantage over soybean oil narrows.

The EU's Deforestation Regulation (EUDR), effective 2026, poses both a risk and an opportunity. While it bans non-compliant imports, palm oil producers meeting sustainability certifications like MSPO or ISPO could see premium pricing. Conversely, the U.S. imposed a 32% tariff on Indonesian palm oil in early 2025, pushing Jakarta to diversify exports to Africa and the Middle East—a shift that could sustain demand despite trade barriers.

Technical Price Levels and Currency Plays
Palm oil prices have averaged RM4,222/MT in 2025, up 4.5% from 2024, with benchmarks hitting intraday highs near RM4,600/MT. Key support levels are RM4,200–RM4,000/MT, while resistance lies at RM4,600 and RM4,800/MT. A sustained breach of RM4,600 could trigger a rally toward RM5,000 by late 2025.

Currency dynamics further amplify the bullish case. The Malaysian ringgit has depreciated 6% against the U.S. dollar since early 2024, improving export competitiveness. Meanwhile, Indonesia's rupiah has weakened 4%, but its higher export levies ($221/MT vs. Malaysia's $140/MT) offset some gains. Investors should consider currency-hedged exposure to mitigate exchange rate risks.

Policy Risks and Market Volatility
The outlook is not without risks. Weather disruptions—particularly La Niña-related rains—could delay Malaysia's production recovery, while soybean oil prices (a key substitute) remain volatile. A rebound in Ukrainian sunflower oil exports or U.S. soybean yields could also dampen palm oil demand.

Investment Strategy: Bullish Momentum with a Q1 Correction Caution
The structural shortage supports a long-term bullish stance, but traders should prepare for near-term volatility. Key recommendations:
1. Futures Exposure: Buy dips below RM4,600/MT on the Bursa Malaysia Derivatives (BMD) CPO futures contract, targeting RM4,800–RM5,000.
2. Equity Plays: Invest in palm oil producers like IOI Corporation (IOIC.MY) or Golden Agri-Resources (G13.SI), which benefit from higher prices and sustainable certification gains.
3. Currency Hedging: Use ETFs like DB马来西亚 (DBM) to mitigate MYR exposure or consider inverse currency ETFs.

Final Word
Palm oil's upward trajectory is underpinned by an inelastic supply curve and escalating demand from biodiesel. While a Q1 2026 correction is possible—driven by seasonal production peaks and speculative profit-taking—the structural shortage ensures long-term prices will remain elevated. Investors ignoring this trend may miss a multi-year opportunity to profit from one of the world's most strategic commodities.

Stay disciplined, but stay long.