On Wednesday (August 12), Malaysian palm oil futures on the Malaysian Derivatives Exchange retreated after two consecutive days of gains. The benchmark October contract gave back some of its earlier gains in afternoon trading, ultimately closing down 51 ringgit, or 1.07%, at 4,697 ringgit per tonne. The market was mainly pressured by weakness in related vegetable oil markets in Dalian, and concentrated profit-taking by long positions amid a narrowing price spread between palm oil and soybean oil.

Price spread structure triggers profit-taking by long positions

The recent significant narrowing of the palm oil discount relative to soybean oil has compressed arbitrage opportunities across commodities, triggering technical selling in the market. Anilkumar Bagani, Head of Research at Mumbai-based vegetable oil brokerage Sunvin Group, noted in his intraday commentary: "CPO futures fell today, giving back some of the gains from earlier this week, mainly due to profit-taking pressure, as the persistently narrow price spread between soybean oil and palm oil makes soybean oil appear to be under more selling pressure." This logic suggests that under the current price spread pattern, biodiesel producers and food processors may marginally tend to increase soybean oil purchases, thereby suppressing the upward momentum of palm oil. Bagani also mentioned that the weakness in Dalian palm oil futures during the Asian session also contributed to the downward pressure on Malaysian markets.

External edible oil market weakens in tandem

Direct pressure from competing oil varieties was clearly evident in yesterday's trading. Data shows that during the Asian trading session yesterday (Beijing time), the most actively traded soybean oil contract on the Dalian Commodity Exchange closed down 0.21%, while the palm oil contract fell by 0.71%. Soybean oil prices on the Chicago Board of Trade saw a slight decline of 0.04%. As a crucial component of the global vegetable oil market pricing, palm oil's price trajectory remains closely linked to its substitutes, and the deeper decline in the Dalian market served as a direct catalyst for yesterday's downward trend in the Malaysian market.

Tax rate lock-in and concerns about future supply

On the recent policy front, the Malaysian Palm Oil Board announced on Wednesday that Malaysia will maintain its September crude palm oil reference price at a level where the export tariff remains unchanged at 10%. This decision locks in near-term export cost expectations and has not generated additional marginal negative or positive impacts on the spot market, allowing prices to return more to the fundamental supply and demand dynamics. Traders should be wary of the long-term supply risks. SD Guthrie, one of the world's major palm oil producers, issued a warning on Tuesday that palm oil production in 2027 and 2028 is expected to be impacted due to the anticipated drier and hotter weather brought by El Niño. While this production guidance from an industry giant is a medium- to long-term variable, it confirms the lag in the disruptive effect of weather pattern changes on the oil palm tree growth cycle. At the current stage, this expectation may form a potential bottom support in long-term contracts, limiting the potential for a significant price decline.

External macroeconomic factors pull in both directions

Volatility in the energy market continues to provide a complex macroeconomic backdrop for palm oil. On Wednesday, crude oil prices rose during the session as attacks on two ships exacerbated concerns about supply disruptions in the Middle East. Theoretically, stronger crude oil futures would increase the attractiveness of palm oil as a feedstock for biodiesel. However, industry data simultaneously showed that US crude oil inventories are expanding, which is suppressing further price increases. This two-way tension makes it difficult for the biodiesel theme to provide a one-sided boost to palm oil in the short term. Furthermore, the ringgit appreciated 0.17% against the US dollar yesterday, slightly increasing procurement costs for buyers holding foreign currency. In the absence of strong demand, this minor cost change also served as a contributing factor to long position liquidation.

Frequently Asked Questions

Why did palm oil prices fall despite rising crude oil prices? Yesterday's decline in palm oil was mainly driven by internal factors within the edible oil sector. Although crude oil prices rose due to geopolitical risks, the expansion of US crude oil inventories limited gains, resulting in insufficient support for palm oil and biodiesel themes. Conversely, the deeper decline in related vegetable oils in Dalian and the narrowing price spread between palm oil and soybean oil triggered profit-taking, directly suppressing the market. What is the specific logic behind "narrowing price spread leading to selling pressure"? This refers to the shrinking price discount between palm oil and soybean oil. For buyers, when palm oil prices approach soybean oil prices, their price advantage decreases, and they may shift their purchases to soybean oil. Anilkumar Bagani's view suggests that it was precisely because soybean oil faced relatively heavier selling pressure on the price spread that long positions in the palm oil market were liquidated, leading to a price correction. Why do forward supply warnings affect current prices? The production reduction warning for 2027-2028 mentioned by SD Guthrie reflects the lagged impact of weather patterns. While it doesn't directly change near-term inventories, it strengthens bullish expectations for longer-term contracts, helping to prevent panic selling in the face of negative news and supporting the term structure of prices. What impact will Malaysia's latest tax policy have? Malaysia will maintain its September crude palm oil export tariff at 10%. This policy is in line with market expectations, maintaining export cost stability. With no new negative or positive factors, market sentiment after the announcement focused more on immediate demand and fluctuations in competing edible oil prices. How does the appreciation of the ringgit affect the market? A stronger ringgit means that palm oil priced in ringgit becomes more expensive for overseas buyers holding foreign currencies such as the US dollar. This typically dampens purchasing intentions during periods of low demand or fragile market sentiment, translating into slight selling pressure on the market and contributing to yesterday's profit-taking.