SINGAPORE/JAKARTA/KUALA LUMPUR -- Palm oil prices are jumpy this year, with markets rattled by geopolitical tensions and shifting biofuel policies that are reshaping markets for one of Southeast Asia's most important commodities.
Indonesia and Malaysia, which together produce 85% of the world's palm oil, face rising uncertainty from U.S. tariffs and the European Union's anti-deforestation law, which takes effect in December. The recent conflict between Iran and Israel has fueled still more volatility.
Although supply has recovered in recent months, analysts and industry players expect palm oil prices to stay fluid this year and into 2026, with potential changes to Indonesia's biodiesel mandate and tightening sustainability rules clouding the outlook.
"The palm oil market is navigating a storm of overhead pressure," said Atef Souki, head of palm oil derivatives at financial services company Marex, noting how U.S. tariffs are shifting trade flows. "We expect continued swings in palm oil prices, tied to both geopolitical shocks and supply adjustments."
Used in a variety of food products ranging from cooking oil and margarine to instant noodles, palm oil is the most consumed vegetable oil and remains particularly popular in Asian markets such as Indonesia, India and China. The highly versatile commodity is also used in cosmetics and biofuels.
But palm oil prices have faced a turbulent year. The benchmark Malaysia-listed front-month crude palm oil (CPO) futures contract ended the first half of the year at 3,986 ringgit ($942) per metric ton, down 18% through June 26, as production recovered from earlier weather disruptions in Indonesia and Malaysia.
The sharp decline followed a surge earlier this year driven by Indonesia's so-called B40 biodiesel mandate, which requires a 40% palm oil blend in diesel fuel. The policy, which aims to curb both the country's rising oil import bill and carbon emissions, has lifted domestic demand and limited exports.
For the rest of the year, Fitch Solutions' BMI said in a July 1 report that it expects palm oil prices to trade between 3,800 and 4,000 ringgit per ton, bringing the average annual price to 4,150 ringgit. Prices are forecast to ease in 2026, to 4,075 ringgit on average.
But a brief price spike last month underscored how sensitive the market remains to external shocks. Front-month Malaysian palm oil prices rose around 6% between June 12 and June 16, following the outbreak of the Israel-Iran war. The conflict pushed up global oil prices and renewed interest in alternative fuels such as palm-based biodiesel. Crude oil prices have settled down since the de-escalation of the conflict and palm oil prices have as well.
"As a key biofuel feedstock, palm oil prices remain closely linked to crude oil," said Matthew Biggin, senior commodities analyst at BMI. "Any sharp increase in crude prices due to geopolitical events will continue to provide support to the palm oil market."
More importantly, the June rally coincided with major policy shifts in the U.S. The Environmental Protection Agency has proposed raising the biofuel blending requirements for diesel and petrol by 8% to a record 24 billion gallons (90.8 billion liters) in 2026, including a 67% surge in biomass-based diesel targets. Although palm oil is not used in U.S. biofuels, higher demand for soybean oil used in U.S. biodiesel tightens global edible oil supplies, indirectly raising palm oil prices.
Palm oil is vital to Southeast Asia's economies. In Indonesia, the world's top producer, it contributes 3% to 4% to gross domestic product and supports millions of jobs. In Malaysia, it is the leading agricultural export. With the two countries accounting for nearly 90% of global exports, BMI warns the market faces "concentrated exposure" to weather risks in the region.
Despite the earlier volatility, analysts say the market has found support from inventories, policy-driven demand and energy market spillovers. "We now expect prices to fluctuate within a range, going forward, rather than continuing the sharp decline seen in the first half of 2025," said Sunny Nguyen, an economist at Moody's Analytics.
In May, Malaysia's palm oil stockpiles rose to almost 2 million tons, their third straight month of increases and the highest level in eight months. The latest data from Indonesia's Palm Oil Association, known as GAPKI, showed inventories jumped 51% in April from the previous month, reaching their highest level since May last year.
At the same time, analysts warn the industry faces significant unknowns. Hedgepoint Global Markets, a risk management specialist, points to multiple structural risks and a "highly fluid" outlook, citing, in particular, changing biodiesel regulations in Indonesia.
Indonesia is considering raising its biodiesel blend to B50 as soon as next year, a move that could increase domestic palm oil consumption by 1 million to 2 million tons annually, according to Hedgepoint. The shift "would likely reduce export volumes and tighten global stocks" across the regional market.
Indonesian watchdog Sawit Watch has raised concerns over the higher biodiesel mandate, warning that pushing the policy without sufficient supply could lead to price spikes, as happened in 2022 and 2023.
Despite growing domestic consumption, Indonesia's palm oil output has remained stagnant over the past six years, ranging from 51.2 million tons to 54.8 million tons annually. Industry group GAPKI expects supply to remain relatively flat this year, with annual growth estimated at around 3%.
To boost production, the Indonesian government is encouraging replanting, particularly among small farmers. In 2024, only around 38,000 hectares were rejuvenated, just slightly over a half of the initial target of 70,000 hectares. This year, it has set a significantly higher target of 180,000 hectares for smallholder oil palm rejuvenation.
Looming U.S. tariffs are another source of concern, with levies of 32% on Indonesian imports and 24% for products from Malaysia possibly resuming when a 90-day pause ends on July 9. "If the U.S. decides to revert the tariffs to their original levels ... from the current baseline rate of 10%, it could pose risks to the palm oil market," Kian Pang Tan, agriculture research lead at LSEG, said in a July 2 report.
Local producers are also closely monitoring these developments. Malaysian-listed SD Guthrie said it expects "high price volatility is likely to persist," citing continued macroeconomic and geopolitical pressures on near-term pricing.
To mitigate such risks, Malaysia is seeking to diversify its export markets. "We cannot rely solely on existing markets," Plantations and Commodities Minister Johari Abdul Ghani told reporters on June 21, noting a focus on key destinations such as China, India and the European Union.
But Southeast Asia's palm oil industry is facing greater regulatory pressure from Western economies. The EU Deforestation Regulation, set to take effect in December, requires importers to prove that the palm oil they sell is not linked to deforestation. For producers, the regulation threatens to make market access more difficult and raise compliance costs, particularly for smaller farmers.
"Malaysia must adjust to these demands," Johari said, emphasizing that producers must show that plantation and production practices meet European environmental standards.
Helena Varrkey, associate professor of environmental politics at the University of Malaya, said Malaysia has generally been "slightly faster" to adapt to European standards than its main competitor, Indonesia, citing its higher uptake of certification schemes widely recognized in Western markets.
Still, in the EU and other economies with growing sustainability concerns, analysts say palm oil demand for fuel is likely to remain constrained by regulatory barriers and a broader shift toward alternative feedstocks such as used cooking oil and animal fats.
"While overall global demand for palm oil will remain supported, the growth will be increasingly concentrated in Asian markets with strong biofuel policies," said Biggin of BMI.
Additional reporting by Rezha Hadyan in Jakarta and Dylan Loh in Singapore.
