Supply woes and strong demand drive biggest rally in over a year

Palm oil prices saw a notable rally throughout July 2025, as global supply tightness met with surprisingly strong demand from major importing countries. Crude palm oil (CPO) futures on Bursa Malaysia Derivatives averaged MYR 4,235 per tonne in the first three weeks of July — marking a nearly 12% increase from June and reaching the highest level since early 2023. The sharp upswing is being driven by a combination of factors, from weather-related production challenges in Southeast Asia to a resurgence in buying activity from India and China.

 

Weather, Policy, and Supply Constraints Keep Pressure on Production

Production numbers out of Southeast Asia offered little comfort to buyers. In Malaysia, output fell 1.8% in June to 1.55 million tonnes, as El Niño conditions cut yields in key producing regions like Sabah and Sarawak. Over in Indonesia, production has been flat year-to-date, hampered by lingering fertilizer shortages and labor constraints, according to GAPKI.

Adding to the squeeze, Indonesia officially rolled out its nationwide B40 biodiesel mandate this month. The policy, which requires a 40% palm oil blend in diesel, is estimated to absorb an extra 120,000 tonnes of palm oil monthly from domestic stocks. This move tightens exportable supply even further — just as global buyers ramp up orders.

India, for instance, booked 1.15 million tonnes of palm oil for August–September, the highest in 16 months, according to the Solvent Extractors’ Association (SEA). China also boosted its purchases, with June arrivals reaching 618,000 tonnes — the most since October 2023 — driven by palm oil’s favorable price spread over soybean oil.

Meanwhile, higher global crude oil prices have lent additional support to palm-based biodiesel demand in Europe. Brent crude hovered around USD 78 per barrel in early July, incentivizing discretionary blending in EU markets. TradingEconomics data shows the palm‑oil‑to‑gas‑oil spread narrowing to USD 205 per tonne, making biodiesel blending more attractive.

Outlook: More Gains Ahead or Due for a Pause?

Market optimism was further reinforced by the USDA’s July Oilseeds Report, which trimmed 2025 global ending-stocks forecasts due to weaker Southeast Asian output. In response, analysts at CIMB raised their full-year price forecast for CPO to MYR 4,000 per tonne — up from MYR 3,700 — highlighting strong fundamentals and ongoing demand from India and China.

That said, not all signals point upward. Data from Intertek showed that Malaysian exports dipped 4.1% in the first 20 days of July, amid slower demand from the Middle East and Africa. At the same time, the traditional pricing advantage of palm oil is narrowing. Soybean oil’s premium over CPO fell to just USD 85 per tonne, the tightest since January, which could prompt some buyers to pivot back to alternative vegetable oils.

Looking ahead, weather developments in August — especially in Malaysia and Indonesia — will be key to determining whether production can recover. Traders are also watching closely for any announcements regarding a possible B50 biodiesel mandate in Indonesia. If output fails to rebound in Q4, many analysts believe that CPO prices could climb into the MYR 4,400–4,500 range, potentially squeezing margins for downstream sectors such as oleochemicals and food manufacturing.