Behind the Soaring Palm Oil Prices: Multiple Bullish Factors at Play-How Long Will This Rally Last?
The edible oils market has been buzzing lately with a wave of bullish news. The Malaysian Palm Oil Board (MPOB) report defied bearish expectations, Indonesia announced plans to raise the palm oil blending ratio in biodiesel to 50%, the USDA lowered its forecast for U.S. soybean acreage, and the preliminary ruling on rapeseed anti-dumping measures was finalized. These positive developments combined to drive sequential gains in the three major edible oils: soybean oil, palm oil, and rapeseed oil.
Over the past three days, the edible oils sector attracted over 3 billion yuan in capital inflows, with palm oil and rapeseed oil particularly favored. The new front-month palm oil contract, 2601, broke through the 9,500 yuan/ton mark, hitting a seven-month high of 9,540 yuan/ton. However, rapeseed oil's rally paused as enthusiasm cooled too quickly, and palm oil's night session gains also slowed. So, how long can this palm oil rebound last?
First, let's look at Malaysia. The most surprising aspect of this month's MPOB report was the consumption data. Malaysia's domestic palm oil consumption reached 480,000 tons in July, up 6.6% month-on-month. This not only far exceeded institutional forecasts of 350,000–368,000 tons but also surged 86% year-on-year, setting a new monthly record. The official report last month already showed domestic consumption well above average, and while many expected this high consumption to be unsustainable, July's numbers not only held firm but expanded even further year-on-year.
On the export front, Malaysia's palm oil exports reached 1.309 million tons in July, up 3.8% month-on-month. Although this was only slightly higher than market expectations of 1.3 million tons, it reversed the declining trend predicted by the three major shipping surveyors. With production in line with expectations and both domestic consumption and exports exceeding forecasts, Malaysia's palm oil inventory increased by just 4.02% month-on-month to 2.11 million tons in July, significantly lower than the institutional estimate of 2.25 million tons.
Typically, Malaysia's domestic consumption is viewed as a residual adjustment item, encompassing both food and industrial use. The last significant surge in domestic consumption occurred in the fourth quarter of 2023. At that time, food consumption alone couldn't account for the volume, and with the POGO spread (the price difference between palm oil and gasoline) at low levels, market speculation centered on biodiesel profits driving Malaysian oleochemical companies to stockpile raw materials at low prices. However, the current situation is different. Malaysia has no new policies promoting biodiesel, and the POGO spread is relatively high, which theoretically reduces incentives for companies to blend palm oil into biodiesel. Thus, the market suspects that July's high consumption may reflect stockpiling by domestic end-users in Malaysia, which could represent hidden supply. Whether this domestic demand growth is sustainable remains to be seen.
Currently, strong palm oil exports are bolstering producers' confidence in supporting prices. According to data from shipping surveyors ITS, AmSpec, and SGS, Malaysia's palm oil exports from August 1–10 increased by 65.3%, 23.3%, and 23.7%, respectively, compared to the same period in July. Breakdown data from ITS shows that India's purchasing demand was the main driver of exports, with Malaysia exporting 108,000 tons of palm oil to India in the first half of August, up 79% month-on-month. Additionally, Indonesia's increase in palm oil export tariffs in August led some buyers to shift to Malaysian palm oil to avoid higher costs.
With India's seasonal consumption peak approaching and pre-Diwali stocking demand expected ahead of October 21, palm oil prices are likely to remain supported. However, August to October is the peak production season for palm oil, so the key question is when the turning point for Malaysia's palm oil inventory will occur.
Turning to Indonesia, the country has also been active lately. In recent years, Indonesia has consistently raised the palm oil blending ratio in biodiesel, currently at 40% (B40), a policy implemented since the beginning of this year. This past Monday, Indonesia reiterated its plan to increase the blending ratio to 50% starting next year, undoubtedly injecting a dose of optimism into the market. However, this plan is unlikely to be implemented immediately in January next year, as the government needs to conduct a series of tests on the new B50 fuel, which could take up to eight months.
Indonesian Energy Minister Bahlil Lahadalia stated that approximately 6.8 million kiloliters of B40 biodiesel were distributed in the first half of the year, achieving half of the 2025 target of 13.5 million kiloliters. The Indonesian Biofuel Producers Association previously estimated that full implementation of B50 could raise annual palm oil demand to 19 million kiloliters, significantly higher than this year's planned distribution of 15.6 million kiloliters, which would substantially increase domestic palm oil consumption.
Beyond biodiesel policies, Indonesia also emphasized this week its commitment to regulating the domestic cooking oil market through the Domestic Market Obligation (DMO) policy, which has further supported palm oil prices. The DMO policy requires producers to sell a portion of their products at regulated prices in the domestic market to obtain export permits. An official from the Trade Ministry revealed this past Monday that producers have been instructed to maintain DMO levels at 175,000 tons per month until the end of the year to ensure sufficient domestic cooking oil supply and stabilize prices.
In August last year, Indonesia raised the price ceiling for palm oil under the DMO rules and reduced the monthly target from 300,000 tons to 250,000 tons, but the policy had limited impact on the market at the time. Moreover, in practice, Indonesia's DMO requirements have often been challenging to meet. Latest data shows that from April to June this year, producers sold an average of 157,500 tons of palm oil per month through the DMO, falling short of government expectations.
Shifting focus to China, firm offers from producers have kept palm oil import costs high. Although import margins have improved somewhat, importers remain cautious, with only sporadic buying. Overall domestic palm oil supply pressure is manageable, supporting further inventory drawdowns. According to monitoring data from China Grain and Oils Business Net, as of the end of Week 32, total domestic palm oil inventory stood at 543,000 tons, down 6,000 tons from the previous week's 549,000 tons.
However, the severe price inversion between domestic soybean oil and palm oil continues to suppress palm oil consumption, limiting demand to essential needs and slowing the seasonal inventory buildup. Fortunately, the back-to-school season and the upcoming Mid-Autumn Festival and National Day holidays are expected to gradually boost terminal demand.
In summary, in the short term, Dalian palm oil futures continue to rise, supported by the better-than-expected MPOB report and Indonesia's reinforced B50 biodiesel plan. Simultaneously, expectations of constrained raw material imports and higher import costs are supporting rapeseed oil and soybean oil markets, further driving palm oil futures to new highs.
From a fundamental perspective, although the traditional palm oil production peak season is ongoing, supply pressure from producers remains manageable. Both Indonesia and Malaysia are supporting prices while selling, and strong export data is bolstering market sentiment. With India's traditional consumption peak approaching and its significant edible oils shortfall, pre-Diwali stocking demand is expected to support international palm oil prices. China's strong import cost support suggests the palm oil rally is not over yet.
In the fourth quarter, producers will enter the seasonal production downturn. The extent of the subsequent rebound will depend on actual demand performance.
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