Palm Oil's Rally Amid Rising Soybean Oil Prices: A Limited Upside in a Supply-Overhang Environment

The recent surge in palm oil prices, driven by a transient uptick in soybean oil markets, has sparked optimism among investors. Yet, beneath this short-term dynamism lies a complex interplay of structural headwinds that could constrain long-term gains. To assess the investment potential of palm oil, it is essential to dissect the interdependence between soybean oil and palm oil markets while scrutinizing the persistent challenges of supply overhangs, currency pressures, and evolving demand dynamics in key markets like India and China.

Short-Term Drivers: The Soybean Oil Link and Trade Flows

The immediate catalyst for palm oil's recent rally has been the volatility in soybean oil prices, which have been shaped by U.S.-China trade flows and biofuel policy uncertainty. According to a Bloomberg report, soybean oil prices rose by 0.3% in early November following the U.S. Department of Agriculture's announcement of additional soybean and wheat sales to China, a move that briefly bolstered market sentiment. This upward momentum initially spilled over to palm oil, as traders anticipated cross-commodity demand shifts. However, the gains were short-lived. A subsequent 2% decline in soybean oil futures, driven by concerns over potential delays in reducing U.S. biofuel import incentives under President Trump, triggered a reversal in palm oil's five-day rally.

This interdependence underscores the role of soybean oil as a proxy for global vegetable oil demand. When soybean oil prices rise, palm oil often follows, as buyers seek alternatives to hedge against cost increases. Conversely, a slump in soybean oil demand-such as the recent slowdown in China and India-quickly dampens palm oil's appeal.

Structural Headwinds: Supply Overhangs and Currency Pressures

While short-term correlations with soybean oil offer temporary support, palm oil's long-term trajectory is clouded by structural challenges. A critical issue is the persistent supply overhang in Malaysia, the world's second-largest producer. Data from the Malaysian Palm Oil Board indicates that Malaysia's palm oil inventories have grown due to weak export demand, particularly from India and China, which together account for over 40% of global palm oil imports. This overhang is exacerbated by a decline in production in Sabah, where output fell by 10% in early 2025, limiting the ability of producers to reduce stocks through increased exports according to MPOB data.

Compounding these supply-side pressures is the strong Malaysian ringgit, which has made ringgit-denominated palm oil less competitive for price-sensitive buyers. As Bloomberg notes, the currency's strength has eroded the cost advantage of Malaysian palm oil, a critical factor in a market where margins are razor-thin. This dynamic contrasts sharply with the soybean oil market, which is insulated from such currency effects due to its U.S. dollar pricing.

Demand Trends: A Mixed Outlook

The long-term demand outlook for palm oil in India and China appears cautiously optimistic. Reuters reports that both countries are expected to increase imports in 2025, driven by restocking ahead of the summer season and palm oil's price competitiveness relative to soybean oil. In 2024, India imported 3.03 million tonnes of palm oil from Malaysia, while China imported 1.39 million tonnes, reflecting their reliance on the commodity for food and industrial uses according to MPOB data.

However, this growth is not without limits. Structural demand constraints, such as shifting dietary preferences and environmental regulations, remain underappreciated risks. For instance, India's recent relaxation of BIS certification rules-aimed at addressing shortages in cooling appliances-signals a broader trend of diversification in supply chains, which could indirectly reduce reliance on palm oil for certain industrial applications.

Conclusion: A Tenuous Balance

The current rally in palm oil prices, fueled by soybean oil's volatility and short-term demand shifts, offers a fleeting upside. Yet, the structural headwinds-excess inventories, currency pressures, and uneven demand growth-suggest that this optimism is fragile. Investors must weigh the immediate cross-market linkages against the enduring challenges of oversupply and pricing competitiveness. While palm oil may benefit from temporary tailwinds, its long-term trajectory remains constrained by fundamentals that prioritize caution over exuberance.