Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Palm Oil Is Crashing While Crude Oil Rises
Transcript
- Lucas: If you've checked the cooking oil aisle at the grocery store lately, you've seen the sticker shock easing. Palm oil — the world's most widely consumed edible oil — has dropped to a fourteen-month low. And the move is a lot sharper than what's happening in crude. Luna: That's interesting because when I look at the headlines, crude is down, but palm oil seems to be in its own league. What's driving it? Lucas: So crude's down about seven percent this week — West Texas Intermediate at eighty-seven dollars a barrel. That's driven by the ongoing Iran negotiations, the lack of a deal, but also demand fears. Palm oil? It's down twelve percent in just a month. The benchmark futures in Kuala Lumpur are now around three thousand eight hundred ringgit per metric ton — that's the lowest since March 2025. Luna: Twelve percent in a month is brutal. Is this a demand story or a supply story? Lucas: It's both, but the supply side is the real hammer. The USDA's latest global oilseed report — released just last week — showed palm oil production in Indonesia and Malaysia, the two giants that control nearly eighty-five percent of global output, is running well above last year. We've had ideal weather — no El Niño disruption, good rainfall. And those trees that were planted in the 2019-2020 expansion are now in their peak yielding years. Luna: So the trees are delivering. But demand — that's where it gets complicated, right? Lucas: Exactly. Demand is softening on multiple fronts. The biggest shocker is biodiesel mandates. Indonesia, the world's largest palm oil producer, has been pushing a B35 mandate — that's thirty-five percent palm oil blended into diesel. But in April, they quietly slowed its implementation because the crude palm oil fund — which subsidizes the program — is running low. They've even cut the export levy that fills that fund. So less palm oil is being diverted into fuel, and more is flowing into the export market. Luna: Meaning more supply chasing the same global demand. And Malaysia is doing the same? Lucas: Malaysia is also struggling with its B20 mandate — they've delayed full enforcement to 2027. So both producers are effectively releasing more supply into the global edible oil pool at a time when buyers are pulling back. Luna: Who's pulling back? Let's talk about the big importers. Lucas: India is the world's largest palm oil buyer, and they've been reducing purchases. In April, Indian palm oil imports hit a ten-month low. Why? Because domestic stocks are ample — they've been building inventory all year. And prices of competing oils — soybean oil from Argentina and sunflower oil from Ukraine and Russia — have become cheaper. India's refiners are switching. Luna: So there's a substitution effect happening. That's a big deal because palm oil usually undercuts other vegetable oils on price. If it's no longer the cheapest... Lucas: Right. Traditionally palm oil trades at a discount of about fifty to a hundred dollars per ton to soybean oil. Right now, that discount has narrowed to almost nothing. And sunflower oil — which was disrupted by the war in Ukraine — has come roaring back. Ukraine's sunflower seed harvest this year is expected to be the largest since the war began, up twenty-three percent from last year. Russian exports are also strong. So the whole vegetable oil complex is in a glut. Luna: And China — they're the second-largest palm oil buyer. What's happening there? Lucas: China's demand has been sluggish. Their economy is still recovering, and they've been using more domestic rapeseed oil and imported soybean oil. Plus, China's renewable diesel sector — which could have absorbed palm oil — has actually been scaling back because of policy uncertainty around the European Union's anti-deforestation rules. European buyers are shying away from palm oil-based biofuels. Luna: That's a fascinating intersection — environmental policy hitting demand. The EU's deforestation regulation, which kicks in fully next year, essentially requires traceability for palm oil used in biofuels. That's raising costs and pushing European refineries toward used cooking oil or tallow instead. Lucas: Exactly. And that feeds into what we're seeing in crude oil markets too. Brent crude is down eight and a half percent this week, at ninety-one dollars — but that's a different story. Crude's drop is geopolitical: the market is pricing in a potential Iran deal that could bring a million barrels a day of supply online. But palm oil's drop is structural: it's about overproduction, policy shifts, and substitution. Luna: So does that mean the divergence between crude and palm oil could persist? Because crude might bounce if the Iran talks fall apart, but palm oil's problems seem more entrenched. Lucas: I think that's the right way to look at it. The crude-palm oil correlation has been weakening for years. Historically, they moved together because both are tied to global growth and energy prices. But palm oil is increasingly being driven by its own fundamentals — edible oil supply and demand, biofuel mandates, and trade policies. So yes, palm oil could stay under pressure even if crude recovers. Luna: What about the consumer angle? Cooking oil prices in India and Southeast Asia have been falling — that's a welcome relief for households that were hit hard during the 2022 spike. But are we getting close to a bottom? Lucas: That's the million-dollar question. The USDA is forecasting global palm oil stocks to rise to a five-year high by the end of 2026. That suggests more downside potential. But there are wildcards. One is La Niña — which could bring excess rain to Indonesia and Malaysia, disrupting harvesting. Another is a potential rebound in crude oil prices, which would make palm oil-based biodiesel more economical. And then there's India — if they cut import duties further, that could spur buying. Luna: Speaking of which, India's vegetable oil import duty is currently at 12.5 percent for crude palm oil. There have been rumors they could cut it to seven point five percent to cool domestic inflation. That would be a near-term catalyst. Lucas: It would. But even if that happens, the structural overhang is huge. The market is basically swimming in oil — not just palm, but soy, sunflower, rapeseed. Global vegetable oil production is projected to hit a record two hundred and twenty million metric tons this year, up four percent from 2025. Demand is growing at maybe two percent. That math doesn't support higher prices. Luna: So for listeners who want to track this, what should they watch? Lucas: Three things. First, the monthly export data from Indonesia and Malaysia — specifically the export tax and levy changes. Second, the USDA's World Agricultural Supply and Demand Estimates report, which comes out June 11 — that will give updated global balance sheets. And third, watch India's import numbers. If Indian purchases pick up, that's usually the first sign of a floor. Luna: Good framework. I also think it's worth watching the crude palm oil futures curve — it's in contango right now, which means the market expects prices to recover later. But that contango has been widening, which suggests that storage is becoming profitable — and that usually means more supply being held back, which can put a cap on any rally. Lucas: That's a great point. The contango in palm oil is now around thirty dollars per ton per month — that's a strong incentive to store. It tells you the market is oversupplied today but expects a tighter market in six to twelve months. Whether that materializes depends on those wildcards we mentioned. Luna: So bottom line: palm oil is in a cyclical downturn, but the fundamentals suggest it could stay low for a while. For consumers, that's good news — lower cooking oil prices. For investors in palm oil producers or related ETFs, it's a wait and see. Lucas: Yeah, and it's a reminder that commodities are not a monolith. Crude oil and palm oil both have 'oil' in the name, but their markets are driven by completely different forces right now. Luna: Honestly, if walking through the economy with us has made something click for you today, that's the link — buy me a coffee dot com slash fexingo. We keep the show ad-free, and a small gesture from listeners like you makes that possible. Lucas: It really does. And we appreciate every single one. So, back to that contango — let's talk about what happens if the Iran deal actually goes through. That would push crude lower, which could further weaken the biodiesel incentive for palm oil. So we could see even more supply diverted to food use, putting more pressure on prices. Luna: That's a scenario worth watching. And if crude does fall, it might also make renewable diesel from soybean oil more competitive than palm-based biodiesel in the EU. That would be another headwind. Lucas: Exactly. The web is complex, but the through line is clear: palm oil's fate in the second half of 2026 will be written more by edible oil supply and demand dynamics than by anything happening in the Middle East. That's a shift from even five years ago, when energy markets dominated the narrative. Luna: And that's exactly the kind of nuance that makes commodities economics so fascinating. Thanks for walking through it with us. Lucas: Always a pleasure. Until next time.