Palm Oil Volatility: Possible Scenarios Ahead

The Malaysian palm oil futures market is witnessing a fierce battle between several forces: geopolitical tensions, swings in crude oil prices, and critical technical levels, creating a highly volatile trading environment. With prices trading near the crucial support level of 4,072 ringgit, investors need to tread carefully through a minefield of risks and opportunities. Let's examine how this market has become a perfect breeding ground for volatility, and where traders might position themselves now.

The Geopolitical Card: Crude Oil and Iran-Israel Tensions

The price of palm oil doesn't depend solely on supply and demand — it is also closely tied to crude oil prices. Why? Because palm oil is a key feedstock for biodiesel production. When crude oil prices rise above $80 a barrel — as is currently the case amid tensions in the Middle East — biodiesel production becomes economically viable, boosting demand for palm oil.

Right now, tensions between Iran and Israel are keeping oil prices elevated. Should these tensions escalate into a full-blown conflict, oil prices could jump to $90 a barrel, widening the price gap in palm oil's favour (the POGO spread). However, if tensions ease, oil prices could fall, diminishing palm oil's appeal.

Technical Analysis: The Critical 4,072 Ringgit Level

The 4,072 ringgit-per-tonne level represents the "last line of defence." Through to June 2025, prices have been trading within a narrow band between 4,072 and 4,113 ringgit, as buyers and sellers battle for control.

What to watch:

• A breakout above 4,113: Could push prices towards 4,200 ringgit, supported by biodiesel demand and a weaker currency.
• A drop below 4,072: Could trigger a slide towards 3,950 ringgit, with bearish speculators eyeing the annual low of 3,565 ringgit.

Traders are advised to hold long positions as long as prices remain steady at 4,072 and oil stays above $80, but should be prepared for turmoil should geopolitical risks escalate.

Currency War: The Ringgit's Secret Weapon

The Malaysian ringgit has fallen 3% since the start of the year, making palm oil exports cheaper for global buyers — a hidden factor supporting prices. Should the ringgit weaken further (say, to 4.30 against the dollar), this could trigger a significant surge in demand, even as physical stocks rise.

Export Dynamics: India's Appetite Versus Indonesia's Policies

• India: With soybean oil prices up 6% on the back of US biofuel policy, India has stepped up its palm oil purchases. May exports hit a six-month high, though the recent cancellation of a 65,000-tonne shipment is a reminder of how volatile this demand can be.
• Indonesia: Jakarta's imposition of B40–B50 biodiesel mandates will lock up 2 million tonnes of palm oil domestically this year, tightening global supply. This is a supportive trend for prices, unless output outpaces exports.

The Vegetable Oils Battle: Soybean Oil as a Rival

Competition with soybean oil is not merely theoretical. Soybean oil prices are climbing on the back of US ethanol policy, making palm oil a cheaper alternative. But should soybean oil prices fall — for instance, due to a bumper South American harvest — palm oil could lose its competitive edge.

How to Position for the Next Move

Bullish scenario:

• Buy the June 2025 contract (MPOCM25) if prices hold above 4,072 ringgit and oil stays above $80.
• Target: 4,200 ringgit
• Stop-loss: below 4,000 ringgit

Bearish scenario:

• Sell the contract if prices break below the 4,072 ringgit level.
• Target: 3,950 ringgit
• Hedge with crude oil put options should geopolitical risks subside.

Neutral scenario:

• Use a straddle of call and put options at the 4,100 ringgit level to capture a sharp move in either direction.

Conclusion: Time to Bet on Volatility

Malaysian palm oil is no longer just a commodity — it has become a flashpoint where geopolitical tensions and technical analysis collide. With crude oil remaining in the spotlight and export data from India and Indonesia poised to move the market, this is not the time to sit on the sidelines.

Treat the 4,072 ringgit level like a game of chess: move cautiously — but move decisively.

The palm oil market is not for the faint of heart. But for those who can read the oil price signals and the technical charts well, there are gains to be made amid the friction.

Source: Ainvest