Palm oil under pressure and its adjustment
Palm oil futures have been volatile since January 2026, pressured by high Malaysian inventories and policy uncertainty in Indonesia. While production is easing and exports improving, delayed biodiesel expansion and weak import margins, especially in China, are capping gains despite expectations of tighter supply later in Q1.
Since January 2026, domestic and international palm oil futures prices have been volatile, driven primarily by factors such as pressure on Malaysian palm oil inventories, Indonesian policy changes, and macroeconomic sentiment. On January 15, the palm oil futures market witnessed a fierce battle between bulls and bears, with bullish positions taking profits and closing out, resulting in prices reversing nearly a week’s gains.
Overall, the Malaysian Palm Oil Board (MPOB) report released last week showed palm oil inventories exceeding market expectations, indicating ongoing pressure from inventory accumulation. On the demand side, Malaysian palm oil exports showed a slight improvement, with shipments in early January up 31% compared to the previous month. Furthermore, inventory buildup in India during Ramadan is expected to support demand. On the policy side, Indonesia’s export regulations remain uncertain. Furthermore, low oil prices are constraining industrial demand, while improving global macroeconomic sentiment is providing some support for prices. Near-term palm oil markets face a combination of bullish and bearish factors, with significant upward pressure.
The supply and demand balance in Malaysia is improving.
The MPOB report indicates that palm oil supply remained high in December 2025, while demand was weak, with stocks reaching record highs. However, high-frequency monitoring data for January 2026 shows a deepening decline in production and a slight improvement in exports, suggesting that pressure on stocks may gradually ease.
On January 12, the MPOB released palm oil supply and demand data: Malaysian palm oil production for December 2025 reached 1.8298 million tonnes, down 5.46% from the previous month but above market forecasts of 1.76 million tonnes. Despite the seasonal decline in production, output was the second-highest for this period since 2018, and the supply contraction fell short of expectations. Exports reached 1.317 million tonnes, up 8.52% from the previous month and exceeding market forecasts of 1.23 million tonnes, reaching 1.25 million tonnes. Inventories rose 7.58% month-on-month to 3.051 million tonnes, reaching their highest level since February 2019, indicating ongoing pressure on inventory accumulation.
Meanwhile, high-frequency data for January 2026 indicate a slight improvement in the supply and demand dynamics for palm oil in Malaysia. The larger-than-expected production decline is primarily due to the onset of natural palm dormancy and a shortage of foreign labor, which limits harvest efficiency. On the export side, palm oil supplies from Malaysia improved markedly, as stockpiling in India during Ramadan and pre-Lenten demand in China coincided with a reduction in export duties in Indonesia, leading to a drop in international palm oil prices. Regarding inventories, despite high inventories in December 2025, the combined impact of reduced production and improved exports in January will significantly slow inventory growth. Malaysian palm oil inventories are expected to reach a turning point in the first quarter of 2026.
Indonesian politics remains a key factor.
According to the Indonesian Palm Oil Association (GAPKI), palm oil production in Indonesia has recovered since the fourth quarter of 2025, while consumption has stabilized and is growing, easing pressure on inventories. Recent policy decisions by the Indonesian government have been a critical factor: on the one hand, Indonesia plans to confiscate an additional 4-5 million hectares of illegal oil palm plantations in 2026, representing approximately 25% of the current total area. This move could curb palm oil production growth in the medium and long term. On the other hand, to support the biodiesel production program (consumption of which will reach 14.2 million liters in 2025, up 7.6% from the previous year, following the implementation of the B40 plan), the Indonesian government intends to increase the export tax on crude palm oil. The head of Indonesia’s plantation fund management agency said the country will raise the export duty on crude palm oil from the current 10% to 12.5%, effective March 1, 2026.
Tariff increases will directly increase the cost of palm oil production in Indonesia, reduce its price competitiveness, and potentially shift demand toward Malaysian palm oil. Reduced supply, coupled with rising domestic consumption, as well as adjustments to Indonesia’s export duties, will support international palm oil prices.
However, Indonesia’s Deputy Energy Minister announced this week that the country had abandoned plans to increase the mandatory share of biodiesel in the fuel mix to 50% this year, maintaining the current B40 program. The delay in the B50 plan has somewhat slowed the pace of further growth in global palm oil prices.
Import profits in China remain low.
Regarding import profits, data shows that since the beginning of this year, the near-term palm oil supply profit margin relative to futures prices has been -121 yuan per tonne. While this represents a slight recovery from previous levels, it remains in negative territory. The domestic palm oil market is currently experiencing a weakening supply-demand balance, and commercial inventories remain high. Low import margins are dampening purchasing enthusiasm, although December 2025 shipments are already showing signs of declining.
Commercial Stocks: As of January 9, 2026, commercial palm oil stocks in key regions of the country totaled 736,000 metric tons, up 2,200 metric tons (0.30%) from the previous year. Compared to the same period last year (501,200 metric tons), stocks increased by 234,800 metric tons (46.85%). The domestic palm oil market remains oversupplied, but a slight reduction in imports may gradually ease inventory pressure. Traders should monitor the impact of profit recovery and changes in demand on the market.
Overall, following the MPOB report’s publication, bearish factors have largely been priced in, leading to a recovery in palm oil prices. Future trading depends on a slight improvement in Malaysian palm oil supply and demand dynamics in January, Indonesia’s biodiesel program, and changes to its export duty policy. Furthermore, expectations remain that Indonesia will increase its palm oil export duties, and its plantation confiscation plan merits attention. Weak oil prices continue to weigh on industrial demand. Palm oil futures have recently shown limited upward momentum due to bearish factors, including rising inventories in producing countries, the phased suspension of Indonesia’s B50 program, and persistently high domestic palm oil inventories. Market focus should remain on supply levels in producing countries.
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Source : Ukr Agro Consult
