Malaysian palm oil futures closed lower on Wednesday (March 25), hitting a two-week low, dragged down by the plunge in international crude oil prices and weakness in Dalian edible oil futures. Despite strong export data on the fundamentals, market trading has shifted its focus entirely to macro sentiment and geopolitical risks, exhibiting a typical short-term divergence between "weak reality and strong expectations."

Crude oil prices are driven by market sentiment, while positive fundamental factors are temporarily overshadowed.

As of Wednesday's close Beijing time, the benchmark palm oil contract for June delivery on the Malaysian Derivatives Exchange settled at 4,496 ringgit per tonne, down 41 ringgit, or 0.9%, from the previous trading day. Prices were under pressure during the session, mainly due to external market factors.

As a key indicator of palm oil prices, international crude oil futures prices plummeted by approximately 4% on the day. Market sources reported that the United States presented Iran with a 15-point proposal aimed at ending the conflict in the Middle East. This development triggered strong market expectations of a potential easing of tensions in the Middle East and a reduction in the risk of crude oil supply disruptions. For palm oil, the weakening of crude oil prices directly diminished its economic appeal as a feedstock for biodiesel , thus putting direct pressure on futures prices.

Paramalingam Supramaniam, director of the Selangor-based brokerage firm Pelindung Bestari, pointed out in his market analysis that current market sentiment is almost entirely driven by crude oil price movements, with fundamental factors temporarily ignored. He stated explicitly, "Everything depends on the sentiment in the crude oil market and the progress of negotiations surrounding the US-Iran conflict." This view accurately summarizes the core contradiction in the current palm oil market: the interplay between strong fundamental data and fragile macroeconomic sentiment .

Export data is strong, but concerns about weak demand remain.

On the fundamentals front, data released by shipping surveyors shows that Malaysian palm oil product exports increased significantly from March 1-25, with growth ranging from 38.4% to 50.6% compared to the previous period . This data is generally interpreted as a strong demand signal, which should theoretically support prices.

However, the market reaction was muted. Instead, concerns about demand emerged from another angle. According to industry sources, Indian vegetable oil refiners are reducing their purchases of palm oil, soybean oil, and sunflower oil , anticipating that the price increases driven by geopolitical conflicts are unsustainable. This indicates that Indian buyers, the world's largest importer of vegetable oils, are taking a cautious approach to the current high prices, and their "buy high, sell low" mentality is shifting towards a wait-and-see strategy, anticipating a price correction. This reduced acceptance of high prices is another factor suppressing palm oil prices.

External markets weakened in tandem, putting short-term pressure on the market.

Palm oil futures prices are highly correlated with competing vegetable oil markets. On Wednesday, the most active soybean oil futures contract on the Dalian Commodity Exchange fell 0.67% , while its palm oil contract fell even more sharply, down 1.74% . Soybean oil prices on the Chicago Board of Trade also declined slightly. The weakness in China's domestic edible oil futures market, through cross-market arbitrage and sentiment transmission, has exerted significant downward pressure on the Malaysian palm oil market.

It's worth noting that the ringgit fell 0.23% against the US dollar on Wednesday. Theoretically, a weaker currency is beneficial for exports, making ringgit-denominated palm oil more attractive to buyers holding foreign currency. However, faced with a sharp drop in oil prices and risk aversion driven by uncertainty in the Middle East, this monetary benefit failed to effectively boost the market.

In conclusion, the palm oil market is currently at a critical juncture. On the one hand, strong export data provides solid support at the bottom; on the other hand, macroeconomic sentiment and geopolitical risks leading to crude oil price volatility, along with resistance to high prices from major importing countries, collectively constitute short-term upward resistance. This indicates that the market's focus is shifting from supply-side tightness to macroeconomic uncertainty and the dampening effect of high prices on demand . In the coming week, traders need to closely monitor substantial developments in the Middle East situation and the next move in crude oil prices, as these will be key indicators determining whether the palm oil market can break free from its current weak and volatile trend.

FAQ

Question 1: Why did strong export data in March fail to boost palm oil prices?
Answer: Although the significant month-on-month increase in exports indicates strong purchasing demand, the dominant factor in the current market has shifted to macro sentiment. International crude oil prices plummeted due to the potential easing of tensions in the Middle East, coupled with a cautious attitude from major importer India towards high prices and a slowdown in purchases. These two major negative macro factors have temporarily outweighed the strong export fundamentals, causing prices to fall instead of rise.

Question 2: How does the decline in crude oil prices affect the palm oil market?
Answer: The decline in crude oil prices mainly affects palm oil through two channels. First, it weakens the economic viability of palm oil as a feedstock for biodiesel. When crude oil prices are low, the profit margin for producing biodiesel using palm oil is compressed, thereby suppressing industrial demand. Second, as a bellwether for the commodity market, crude oil price fluctuations can trigger changes in investor sentiment, which in turn affects fund flows, thus negatively impacting palm oil futures prices.

Question 3: What is the relationship between the geopolitical situation in the Middle East and palm oil prices?
Answer: The correlation mainly lies in market expectations regarding crude oil supply risks. The Middle East is the world's most important oil-producing region, and tensions there push up crude oil prices, which in turn boost palm oil. The material mentions that the US proposed a solution to Iran aimed at ending the conflict, which eased market concerns about crude oil supply disruptions, leading to a drop in oil prices, and consequently putting pressure on palm oil. Therefore, fluctuations in palm oil prices reflect the market's high sensitivity to developments in the Middle East.

Question 4: The devaluation of the ringgit is beneficial to palm oil prices, so why did the market not react on that day?
Answer: The depreciation of the Malaysian Ringgit does indeed reduce the cost of palm oil for foreign buyers, which is theoretically a bullish factor. However, in a market driven by sentiment, this micro-level positive is often overshadowed by stronger macro-level negative factors. On that day, the pressure from the sharp drop in crude oil prices and the general decline in external edible oil markets far outweighed the slight advantage brought by currency depreciation. Therefore, this positive factor failed to be reflected in prices, and the market chose to prioritize digesting the negative news at the macro level.

Question 5: How should we understand the phenomenon analysts describe as "the market ignoring fundamentals"?
Answer: This indicates that the market is in a period driven by events and sentiment. Analysts point out that despite positive fundamentals (such as export data), traders' attention is entirely focused on broader and more uncertain external factors, such as oil price movements and geopolitical negotiations. In this environment, positive fundamental news is temporarily set aside, and the market's short-term price discovery function primarily serves to price in these macroeconomic risks.