Palm oil closes lower for the second consecutive day, but can the "seven-month low" in inventories reverse the trend?

On Tuesday (April 7), data from the Malaysia Derivatives Exchange showed that the palm oil futures main contract (June delivery) fell for the second consecutive trading day. Although it briefly recovered some losses during the session, it ultimately closed down 45 ringgit, a decline of 0.94%, to 4,766 ringgit/ton. Market trading sentiment was constrained by the weak performance of crude oil prices, while the inventory data to be released next was expected to provide potential downside support from the fundamentals.

Crude oil price fluctuations dominate short-term trading sentiment

The core trading logic in the current palm oil market still closely tracks external energy markets. Paramalingam Supramaniam, director at the Selangor broker Pelindung Bestari, said the market continues to be constrained by crude oil’s directional guidance, alongside uncertainty arising from Middle East geopolitical developments. As of 18:10 Beijing time, the Brent crude benchmark contract was down 0.75%, at $111.93 per barrel.

The weakening of crude oil directly reduces the economics of palm oil as a biodiesel feedstock. When crude oil prices fall, the attractiveness of biodiesel blending declines, which in turn suppresses expectations for industrial demand for palm oil. This is the key reason why, even though the current market is supported by bullish factors on the supply side, it has not been able to rebound effectively. Professional traders need to understand that the market’s trading focus is temporarily shifting from the supply-side story to short-term pressure stemming from energy substitution demand.

Inventory drops to July lows expected to provide resilience

Despite crude oil’s downside pressure, palm oil fundamentals are not pessimistic. A survey by a well-known institution suggests that Malaysia’s March palm oil inventories may record the largest monthly decline in three years, falling to the lowest level since July last year. This assessment is based on the fact that strong growth in March exports exceeded a moderate rebound in production over the same period.

Analyst Supramaniam emphasized that if exports can sustain the strong momentum seen in March, and current inventory levels remain stable, the palm oil market is expected to show resilience. This view is not inconsistent with the slight decline on the current board—short-term sentiment is dragged down by crude oil, but the medium-term fundamental structure is improving.

The Malaysian Palm Oil Board (MPOB) will release its official supply-and-demand report on April 10. At that time, the gap between the actual inventory figures and expectations will become a key indicator guiding the next phase of price direction for palm oil.

Divergence in the trend of related vegetable oil markets

Looking at competing vegetable oils, the market shows a divergent pattern. The Dalian Commodity Exchange’s soybean oil main contract rose 0.85%, while the Dalian palm oil contract on the DCE fell 0.36%. The Chicago Board of Trade (CBOT) soybean oil price edged up 0.11%. This divergence indicates that different vegetable oil markets have their own underlying fundamentals, with palm oil currently being influenced more by the intersection of the export pace from producing areas and crude oil sentiment.

The ringgit’s exchange rate against the US dollar weakened by 0.07% on the day, which slightly reduced the price of ringgit-denominated palm oil for buyers holding foreign currency. Marginally, this could provide a potential positive for exports, but in the short term it has not been able to offset the negative sentiment from crude oil’s decline.

Professional perspective summary

The current palm oil market is caught in a tug-of-war between bulls and bears. In the short term, traders focus on demand concerns driven by weak crude oil, while in the medium term, traders are waiting for confirmation from the April 10 MPOB report of the magnitude of the inventory decline. In the coming trading days, the performance of Brent crude around the $110 level and the pre-report replenishment pace of major purchasing countries will be key variables in determining whether palm oil futures can stabilize above 4,700 ringgit.

Question 1: Why does a decline in crude oil prices lead to weaker palm oil futures?

Answer: A decline in crude oil prices reduces the economic viability of biodiesel blending. Palm oil is one of the main raw materials for biodiesel. When crude oil prices fall, the appeal of using palm oil to produce biodiesel decreases, thereby suppressing expectations for industrial demand and putting pressure on palm oil futures prices.

Question 2: What is the outlook for Malaysia’s March palm oil inventory?

Answer: According to a survey by a well-known institution, Malaysia’s March palm oil inventory is expected to see the largest monthly decline in three years, falling to the lowest level since July last year. The main reason is strong export growth, with the growth rate exceeding the moderate rebound in production.

Question 3: When will the MPOB report be released, and why is it important?

Answer: The Malaysian Palm Oil Board (MPOB) will release its official supply-and-demand report on April 10. The report will publish March actual production, export, and inventory data. The market will compare these figures with the expected values to judge the strength of the fundamentals, making it a key indicator for the direction of palm oil prices.

Question 4: How do changes in the ringgit exchange rate affect palm oil prices?

Answer: Palm oil is traded and priced in ringgit. When the ringgit depreciates, overseas buyers holding foreign currencies such as the US dollar need less foreign currency to purchase the same amount of palm oil—effectively making it cheaper. Theoretically, this benefits export demand and provides support for prices.

Question 5: What is the main contradiction in the current palm oil market?

Answer: The core contradiction lies in the battle between “short-term demand suppression caused by weak crude oil” and “medium-term supply support from inventories at low levels.” In the short term, traders focus on crude oil direction, while in the medium term, traders await the MPOB report to confirm the inventory decline. This results in the market showing choppy movement but with support underneath.