Guotai Junan Futures: Palm Oil's Idealism and Reality Intertwined, Bottom Support and Distant Month Stories Clearly Defined

Since March, palm oil has been characterized by an energy-story driven speculative narrative led by international crude oil prices, with a relatively weak supply-region structure, mainly centered on a linkage to Indonesia’s B50.

As volatility in energy eased and palm oil’s sensitivity to geopolitics declined, the supply-demand picture and technical factors have returned to the main drivers of trading.

From a real-world perspective, however, the pace of destocking in producing regions is still relatively slow. In April, high-frequency production data remains higher than market expectations. Demand in consuming regions is clearly constrained by high prices, and the dampening effect on short-term demand from Argentina soybean oil and India’s domestic vegetable oil is still present. Therefore, the price structure in producing regions continues to weaken, and the fact that Europe’s UCO import profits are inverted has not yet fully translated into a stronger pull from the European O/C diesel shortage onto biodiesel feedstock demand.

But as of last Friday, the structure in the Malaysian market began to strengthen. European UCO import profits opened up. Palm oil’s technical support has been demonstrated, and the conditions for a short-term reversal are in place. The only practical concern is that additional upside room may be further opened or limited by ongoing drag above the price from producing-region large output, high inventories, and recurring geopolitical disruptions—resulting in an overall pattern of wide-range consolidation.

Meanwhile, the probability of a strong El Niño is increasing, and the production-cut effect in 2027 is almost certain. Combined with low conditions for the POGO price spread, the probability that Indonesia will implement B50 ahead of schedule increases significantly. If comprehensive B50 is implemented in the second half of this year, palm oil’s annual biodiesel consumption will rise by roughly 2 million tons year over year, and will continue to increase in 2027 as well, squeezing against the production-cut effect brought by El Niño.

Overall, given strong expectations and real-world improvements that are progressing slowly, we believe the trend toward forming annual price lows in the second quarter will gradually become evident, with a clearer bottoming process. Going forward, it will mainly be about building long positions for farther-dated months on dips triggered by energy pullbacks or current market weakness, and holding long term.

(Guotai Junan Futures)