On Monday (August 24), the November crude palm oil benchmark contract on the Bursa Malaysia Derivatives Exchange closed at 4,946 ringgit per tonne, down 72 ringgit, or 1.43%, equivalent to $1,224 per tonne. This ended a five-day winning streak and retreated from its highest level since December 2024. The pressure that day did not stem from new supply variables in producing countries, but rather from a sector-wide correction triggered by a sharp drop in Chicago soybean oil prices.

Revised expectations for biofuel policies led to a decline in soybean oil prices, putting downward pressure on palm oil.

According to a well-known institution citing a Kuala Lumpur-based trader, the palm oil market retreated from its highest level since December 2024, mainly dragged down by a sharp drop in Chicago soybean oil prices. This followed the US Environmental Protection Agency's signal that it planned to extend the September 1st deadline for refiners' biofuel blending regulations, leading the market to lower its US biofuel demand forecasts. Chicago Board of Trade soybean oil contracts fell 2.36% that day, becoming the main source of pressure for the edible oil sector. Because palm oil and soybean oil are substitutes for each other in the edible oil and biodiesel feedstock sectors, the decline in soybean oil directly dragged down palm oil prices. The Dalian Commodity Exchange soybean oil main contract fell 0.35%, and the palm oil main contract fell slightly by 0.01%, indicating an overall weak edible oil market.

Crude oil pullback and ringgit weakness constitute secondary variables

Crude oil prices fell by more than $1 per barrel on Monday. Investors took profits after the previous rally and awaited further details of new US sanctions against Iran, with market concerns about additional disruptions to Middle Eastern supplies. Weaker crude oil prices mean lower economic viability for biodiesel, putting pressure on industrial demand for palm oil as a biodiesel feedstock. In terms of exchange rates, the ringgit weakened by 0.12% against the dollar, giving dollar-denominated palm oil a slight discount to foreign currency buyers. However, the limited exchange rate fluctuations were insufficient to offset the downward pressure from the simultaneous weakening of soybean oil and crude oil.

Short-term driver shifts, policy implementation and production data are the key factors going forward.

The core reason for this pullback is not a sudden shift to an ample supply in palm oil itself, but rather a marginal revision in expectations regarding US biofuel policy. Profit-taking accumulated during the previous continuous rise was triggered by the sharp drop in soybean oil prices, leading to a rapid price correction. If the EPA's official document confirms an extension, expectations for US soybean oil biofuel demand may continue to be revised downwards, putting continued pressure on the edible oil sector. If policy statements are inconsistent, there is also room for market correction. It is worth noting that if inventories in producing countries remain tight, it may limit the extent of the decline, but this requires verification from the latest high-frequency export and production data. Going forward, key factors to watch include the official EPA announcement, changes in US soybean oil inventories and blending margins, the transmission of crude oil's impact on biodiesel economics, and the actual impact of the ringgit exchange rate on producing country prices.

Frequently Asked Questions

Q: Why did the EPA's extension of the compliance deadline negatively impact palm oil? A: This news led the market to lower its expectations for US biofuel demand, with Chicago soybean oil leading the decline. Palm oil and soybean oil are substitutes in the edible oil and biodiesel feedstock sectors; the drop in soybean oil weakened palm oil. Q: Why does palm oil follow Chicago soybean oil instead of being solely influenced by its own fundamentals? A: Global vegetable oil pricing is highly correlated, with palm oil, soybean oil, and rapeseed oil competing in the food and industrial sectors. Changes in soybean oil prices quickly affect the relative competitiveness of palm oil and trade flows. Q: How does the decline in crude oil affect palm oil? A: Weaker crude oil prices reduce the economic viability of biodiesel, weakening expectations for industrial demand for palm oil as a biodiesel feedstock, thus putting downward pressure on prices. Q: Is the depreciation of the ringgit bullish or bearish for the market? A: A weaker ringgit against the US dollar makes dollar-denominated palm oil slightly cheaper for overseas buyers, theoretically helping export demand; however, the depreciation was only 0.12%, with limited impact. Q: What key variables should be monitored going forward? A: It is worth tracking whether the EPA will issue a formal extension document, US soybean oil inventory and blending profits, export and production data from producing countries, crude oil prices, and the ringgit exchange rate.