Palm oil futures on the Malaysian Derivatives Exchange closed sharply higher on Thursday (January 22). As of 6:30 PM Beijing time, the benchmark April contract rose 44 ringgit, or 1.06%, to settle at 4,198 ringgit per tonne, the highest closing level since November 19, 2025. This strong performance was primarily driven by the impending finalization of new biofuel regulations in the United States and market expectations of a significant decline in January production.



Tightening supply expectations provided key support to the market. Paramalingam Supramaniam, director of Selangor brokerage firm Pelindung Bestari, pointed out that data shows palm oil production in January may see a double-digit percentage decline. "This forecast is consistent with seasonal production declines, but also reflects the continued impact of weather conditions on fresh fruit bunch harvesting in some producing areas." The potential significant decline in production has fundamentally tightened the recent supply and demand balance in the market.

Meanwhile, the demand side also received a significant policy boost. The market is closely watching the final version of the biofuel blending regulations that the U.S. Environmental Protection Agency (EPA) is about to release. According to the agency's proposal last June, the total biofuel blending quotas for 2026 and 2027 will be set at 24.02 billion gallons and 24.46 billion gallons respectively, a significant increase from 22.33 billion gallons in 2025. Supramaniam analyzed this, saying, "The market is trading higher due to expectations that the U.S. will soon release the final regulations on biofuels, which means that the demand for biodiesel feedstock will increase. This move is likely to drive up the prices of soybean oil and palm oil." This policy not only directly improves the long-term demand expectations for vegetable oils as feedstocks for biodiesel, but also strengthens the overall bullish sentiment in the global edible oil market.

The resilience of export demand should not be overlooked. Supramaniam added, "Export demand has also been consistently supportive. Therefore, the overall market is expected to remain optimistic in the first quarter of 2026." Despite competition from other vegetable oils, restocking demand from major importing countries and a relatively favorable price spread structure have kept palm oil exports quite robust. In related markets, the Dalian Commodity Exchange's soybean oil futures contract rose slightly by 0.55%, while palm oil futures surged by 1.59%. In contrast, soybean oil prices on the Chicago Board of Trade fell slightly by 0.28%. This divergence, with domestic demand stronger than international demand and palm oil leading the gains, partly reflects regional differences in supply and demand fundamentals and the market's reaction to specific news.

It is worth noting that international crude oil prices have recently declined due to signs of easing geopolitical tensions, prompting investors to reassess the supply and demand outlook. Theoretically, higher crude oil prices would enhance the economic appeal of palm oil as a feedstock for biodiesel. While the current oil price correction has somewhat dampened short-term speculative sentiment surrounding biodiesel-related stocks, the more fundamental driving force in the long run is the policy direction of various countries promoting renewable energy, particularly increasing the mandatory blending ratio of biofuels. This, to some extent, weakens the marginal impact of short-term oil price fluctuations.

Furthermore, the ringgit strengthened by 0.15% against the US dollar today, slightly increasing the cost of US dollar-denominated palm oil for overseas buyers. However, given strong fundamental expectations, the short-term impact of exchange rate factors was significantly mitigated by the market.

In summary, the current palm oil market is caught between strong expectations and tight realities. On the one hand, the final implementation date and specific figures for the new US biofuel regulations will be key variables affecting medium- to long-term demand growth, and the market holds strong optimistic expectations for this. On the other hand, Southeast Asian producing regions are entering a seasonal production reduction cycle, and preliminary data suggests that the reduction may be greater than expected, forming the most solid foundation for the recent price increase. Both factors combined have driven this round of price increases, breaking through two-month highs.

In the coming weeks, the market's focus will be heavily concentrated on two aspects: first, the official text of the final regulations from the U.S. Environmental Protection Agency and their specific implementation details; and second, the official production, sales, and inventory data for January to be released by the Malaysian Palm Oil Board (MPOB) to verify the actual decline in production. Positive confirmation from either side could inject new upward momentum into prices. However, caution is warranted if the final policy力度 (intensity/strength) falls short of market expectations or if the decline in production is proven false, potentially leading to a correction in the current optimism. From a trading perspective, as "expectations" gradually transform into "reality," market volatility may intensify, and investors need to closely monitor the verification of relevant data.