The Resurgence of Palm Oil Futures: A Strategic Buy Amid Short-Covering, Biodiesel Demand, and Commodity Correlations

The global commodities market is a labyrinth of interdependencies, where the price of one asset can ripple through industries and geographies. Nowhere is this more evident than in the palm oil sector, where a confluence of short-covering activity, surging biodiesel demand, and intricate correlations with crude oil and soybean oil have set the stage for a strategic near-term opportunity. For investors attuned to macroeconomic shifts and commodity interlinkages, the current dynamics in palm oil futures present a compelling case for a calculated entry.

The Short-Covering Catalyst

In Q2 2025, Malaysian palm oil futures experienced a sharp rebound, driven in part by aggressive short-covering. This activity was fueled by a combination of factors: a weaker Malaysian ringgit (MYR) enhancing export competitiveness, record-high stockpiles creating oversupply-driven price dips, and evolving demand patterns in key markets. By July 2025, prices had surged 6.67% from the previous month, with benchmark futures reaching MYR 4,252 per ton. Traders who had shorted palm oil earlier in the quarter—anticipating further declines due to weak demand—began exiting positions as structural risks emerged.

The short-covering was amplified by production declines in Malaysia and Indonesia, which saw June output drop 4.48% and 8%-10%, respectively. These declines, coupled with India's anticipated restocking ahead of the Diwali festival, created a pivot point for the market. Short-covering volume spiked as traders hedged against potential supply shocks from El Niño-driven harvest disruptions and aging plantations.

Biodiesel Demand: The Crude Oil Link

Palm oil's resurgence is inextricably tied to its role in the biofuel sector. With crude oil prices rebounding above $75/barrel in late June, the economics of biodiesel production shifted in favor of palm oil. The POGO (palm oil vs. gasoil) spread, a key metric for biodiesel blending margins, widened to $165/MT, making palm oil a more attractive feedstock compared to alternatives like soybean oil.

This correlation is critical: palm oil prices have historically moved in lockstep with crude oil, as higher energy costs drive demand for renewable fuels. For instance, a 10% rise in crude oil prices in early June 2025 coincided with a 2.04% increase in palm oil futures, underscoring the commodity's sensitivity to energy markets.

Commodity Correlations: Soybean Oil and the POGO Spread

While crude oil provides upward momentum, palm oil's competitiveness against soybean oil remains a double-edged sword. Dalian soybean oil prices, which fell 0.75% on June 26, 2025, reduced pressure on palm oil, allowing it to regain market share in Asia. Conversely, a 0.59% rise in U.S. soybean oil prices highlighted the threat from American exports.

The POGO spread—a gauge of palm oil's relative value—narrowed to a 12-month low in early July, signaling growing substitution risks. However, this narrowing also created a floor for palm oil prices, as buyers sought cost-effective alternatives to soybean oil. For now, palm oil's steep discount to soybean oil (currently 50 USD/MT) acts as a buffer, but investors must monitor Dalian prices closely. A drop below MYR 5,000/ton could trigger a bearish shift, while a sustained premium could validate long-term positioning.

Macro-Driven Positioning: Currency, Policy, and Geopolitics

The interplay of macroeconomic forces further complicates the palm oil narrative. The U.S. dollar's depreciation (to 4.23 USD/MYR by July 7) boosted demand for dollar-denominated palm oil, while Malaysia's export duty cuts (9% in August from 8.5% in July) added a layer of policy support.

Geopolitical tensions, particularly in the Middle East, also played a role. A drop in crude oil prices due to the Israel-Iran conflict initially pressured palm oil, but the resulting oversold conditions attracted short-covering. Meanwhile, the EU's Deforestation Regulation (EUDR) looms as a long-term risk, though Malaysia's 86.5% MSPO certification rate—short of the 95% compliance target—has spurred near-term demand for certified palm oil.

Strategic Buy Case: A Calculated Entry

For investors, the current juncture offers a unique entry point. The short-covering activity in July 2025 has already pushed prices toward the 200-day moving average (MYR 4,050), a critical technical level. A breakout above this threshold could trigger institutional buying and a rally toward MYR 4,150.

The fundamentals also align:
- Supply-Side Constraints: Aging plantations and El Niño-driven yield declines will tighten supply in 2026.
- Biodiesel Tailwinds: Global mandates (e.g., Indonesia's B40) will sustain demand.
- Currency Dynamics: A weaker MYR and stronger dollar will enhance export margins.

However, risks remain. Elevated Malaysian inventories (2.03 million tons as of June) and weak Chinese demand could dampen the rally. Traders should consider a disciplined approach: entering long positions on dips below MYR 4,000 with a stop-loss at MYR 3,950 and a target at MYR 4,300.

Conclusion

The palm oil market is at a crossroads, shaped by a perfect storm of short-covering, biodiesel demand, and commodity correlations. While the near-term outlook is mixed, the structural headwinds—aging supply chains, sustainability pressures, and geopolitical shifts—suggest a longer-term bull case. For investors with a 6–12 month horizon, the current price correction represents a strategic buy opportunity, provided they remain vigilant to evolving macroeconomic signals.