Palm Oil Stocks Surge: A Bearish Signal for Short-Term Investors?

Malaysia's palm oil inventories surged by 6.65% month-on-month in May 2025, reaching 2.01 million metric tons—the highest level since September 2023—according to the Malaysian Palm Oil Board (MPOB). This stock buildup, driven by robust production and Indonesian imports, has intensified concerns about oversupply in a market already grappling with weakening price dynamics. For investors, the data underscores a critical question: Is this a short-term buying opportunity or a sign of prolonged price pressure?

The Supply Surge: Production and Imports Outpace Exports

Malaysia's palm oil output rose 3% in May to 1.74 million metric tons—the highest May production since 2015—due to favorable weather and replanting efforts. However, this supply growth was compounded by a 41,000-tonne increase in Indonesian imports, as neighboring producers replenished stocks at competitive prices. Meanwhile, exports, though up 17.9% to 1.3 million metric tons, were insufficient to offset the combined supply influx.

The divergence between actual and forecasted figures is stark: traders had initially projected stocks to rise by only 5.8%, but the MPOB data confirmed a sharper increase. This widening gap suggests a growing imbalance between production and demand, with inventories now exceeding pre-pandemic levels.

The Bearish Case: Oversupply and Competitive Pressures

The stock buildup has already triggered downward price pressure. Malaysian crude palm oil (CPO) fell to near seven-month lows, trading below MYR 3,920 per tonne in early June—a 12% decline year-to-date. Two factors exacerbate this bearish outlook:

1. Competitive Dynamics with Soybean Oil:
   Palm oil's price advantage over soybean oil—measured by the POGO spread—has narrowed to just $30 per tonne, down from $100 in early 2024. This reduces palm oil's attractiveness for biodiesel blending in markets like the EU and U.S., where mandates favor soy-based oils.

2. Structural Oversupply Risks:
   Indonesia's aggressive export policies, including reduced tariffs and “stock replenishment” imports into Malaysia, are compounding regional supply. Even as India's palm oil imports hit a six-month high in May—driven by reduced import duties—demand remains vulnerable to price fluctuations and rival oil competitiveness.

Investment Implications: Short-Term Bearish, Long-Term Nuance

For short-term traders, the data supports a bearish stance:
- Short CPO Futures: Consider positions in palm oil futures (e.g., BMD Palm Oil Futures) to capitalize on the oversupply-driven price decline.
- Avoid Overweighting Palm Oil Stocks: Companies like IOI Corporation (IOICOMM.MY) and FGV Holdings (FGVHOLDING.MY) could underperform as margins compress.

However, long-term investors should consider strategic plays:
- Wait for a Supply Contraction: Malaysia's labor shortages—particularly in Sabah, where output fell 5% in May—may limit future production growth. A slowdown could rebalance inventories by late 2025 or 2026.
- Monitor Biodiesel Policies: If Indonesia's biodiesel mandate (B40) is enforced rigorously, domestic consumption could absorb excess supply, stabilizing prices.

Divergences and Risks to Watch

• Labor Shortages: Persistent worker shortages in Malaysian plantations could curtail production growth beyond 2025, creating a bullish tailwind.
• Indian Demand Volatility: A second wave of infections or a reversal of import duty cuts could abruptly reduce demand.
• POGO Spread Widening: A rebound in palm oil's price advantage over soybean oil could revive export momentum, easing inventory pressures.

Conclusion: Position for the Short-Term, but Stay Cautiously Optimistic

The May inventory data reinforces a near-term bearish outlook for palm oil prices. Investors should prioritize downside protection while monitoring structural shifts. A strategic long position in palm oil stocks or futures could become viable if supply growth slows and demand stabilizes. For now, the market's focus remains on the oversupply, making short-term caution the prudent strategy.

In the palm oil market, patience and flexibility are key. The path to equilibrium will hinge on whether production constraints or demand recovery emerges first—a race that could define prices for years to come.