On Friday (October 9), the benchmark palm oil contract on the Malaysian Derivatives Exchange closed lower. As of 7:15 PM Beijing time, October palm oil futures fell 69 ringgit, or 1.48%, to 4,592 ringgit per tonne. The contract is still up 1.26% for the week, marking its first weekly gain in three weeks. The market initially rose but then fell. Early in the session, expectations that the Malaysian budget might include export tariff exemptions boosted buying, but as the budget speech concluded and no such measures materialized, long positions quickly closed, and prices gave back all of the day's gains and turned lower.

Budget fails to materialize: Expectations for tariff exemptions fade

The core trading theme in the palm oil market this week was centered on the Malaysian government's budget announcement on Friday. The market had widely speculated that the government might use the budget to exempt crude palm oil from export duties in an effort to narrow the export competitiveness gap with Indonesia. However, the budget only announced replanting assistance measures for smallholders and did not address any adjustments to export duties. David Ng, a proprietary trader at Kuala Lumpur-based trading firm Iceberg X Sdn Bhd, said that palm oil futures gave back previous gains as market optimism about export duty exemptions faded after the budget announcement. He further noted that the market is expected to remain cautious next week, with investors assessing the upcoming Malaysian Palm Oil Board (MPOB) supply and demand report , paying particular attention to September inventory and export performance.

Inventory pressures and weak exports resonate together

The market's caution regarding the MPOB report is not unfounded. A survey by a well-known institution shows that Malaysian palm oil stocks are expected to rise to a record high in September, surpassing the previous peak in December 2018. Soaring production to record highs, coupled with sluggish export demand, are driving the inventory accumulation. The MPOB is scheduled to release official data next Monday, which will be a key indicator for short-term market movements. If stocks confirm a new high and exports lack significant improvement, palm oil prices may face further downward pressure. It is worth noting that the contract still recorded weekly gains this week, indicating that the market had partially priced in the bearish fundamentals before the expectation of tariff exemptions failed to materialize, and the downside potential in the short term may not be straightforward.

Related oils and their correlation with external markets

Other vegetable oil markets showed mixed performance on the day. The most active soybean oil contract on the Dalian Commodity Exchange rose 0.91%, while palm oil rose 0.83%; soybean oil prices on the Chicago Board of Trade rose 0.49%. Palm oil typically fluctuates in line with the prices of competing oils as it competes for market share in the global vegetable oil market. In the crude oil market, prices fell as concerns about Middle East supply eased. US President Trump stated that the US would not attack Iran before next month's election as constructive negotiations to end the conflict progress. Weaker crude oil futures reduced the attractiveness of palm oil as a feedstock for biodiesel. Additionally, the ringgit appreciated 0.12% against the US dollar, slightly increasing procurement costs for buyers holding foreign currency.

Key points to watch in the future

In summary, the short-term logic for palm oil revolves around the MPOB report . If September inventories reach a record high as expected, coupled with the absence of export tariff exemptions, the price may repeatedly test lower support levels. However, this week's weekly gain also suggests that the market has already priced in some of the negative news. If the reported inventory increase is less than expected or export data shows marginal improvement, prices may recover. In the medium term, it is necessary to continuously monitor Indonesian export policy developments, the implementation pace of Malaysia's smallholder replanting plan, and the transmission of crude oil and ringgit price movements to biodiesel demand and import costs. In the absence of new catalysts, palm oil is likely to maintain a wide range of fluctuations, with the direction to be confirmed after the MPOB data is released.

Frequently Asked Questions

Q: Why did the absence of an export tariff exemption in the Malaysian budget lead to a drop in palm oil prices? A: The market had already priced in this expectation, and futures prices included a certain risk premium. After the budget fell through, the expectation gap prompted long positions to be liquidated, causing prices to give back their gains. Q: Why is the MPOB report so important? A: This report provides official data on Malaysian palm oil production, inventory, and exports, and is a core basis for judging the supply-demand balance. The market expects September inventories to reach a record high. Q: How does the decline in crude oil affect palm oil? A: Weaker crude oil prices reduce the economics of biodiesel, decreasing the attractiveness of palm oil as a raw material, putting pressure on demand and thus dragging down prices. Q: What does the appreciation of the ringgit mean for palm oil? A: The appreciation of the ringgit makes palm oil, priced in US dollars, more expensive for overseas buyers, potentially suppressing export demand, which is a bearish factor. Q: What variables should we pay attention to for palm oil next week? A: Focus on inventory and export data in the MPOB report, Indonesian export policy developments, and the interplay between crude oil and the ringgit.