Core View:
The most-traded Dalian Commodity Exchange (DEC) palm oil contract was on the downtrend trajectory since last Monday December 8 against the backdrop of unresolved inventory pressure in Malaysian production areas and the lack of demand-side support in China, with palm oil market undergoing a "bubble-squeezing" adjustment driven by the foundmentals.
I. Market Review:
Sharp Turn from "Production Cut Expectations" to "Inventory Build-up Reality"
Early last week, the market briefly found support from MPOA's larger-than-expected estimate of Malaysia's November production decline (-4.38%). However, the official monthly report released by MPOB on Wednesday (December 10) completely reversed market sentiment.
The report showed that Malaysia's palm oil inventory at the end of November surged by 13.04% month-on-month to 2.835 million tonnes, not only far exceeding market expectations of 2.66–2.71 million tonnes but also reaching a six-year high. Although production declined as expected by 5.3% month-on-month, a sharp drop in exports (down 28.13% month-on-month) was the main driver of the inventory surge. This "worse-than-expected negative report" poured cold water on the market, triggering an immediate plunge in palm oil futures price and setting the tone for the week's bearish performance.
II. Analysis of Key Bearish Factors: Triple Pressure
1. High Inventory in Production Areas, Persistently Weak Exports
The "inventory shock" from MPOB is the core contradiction in the current market. More concerning is that weak exports have shown no sign of improvement in December. Shipping agency data from ITS and AmSpec indicate that Malaysia's palm oil exports during December 1–10 further declined by 10.31%-15% month-on-month. High inventory, combined with weak exports, has created the heaviest downward pressure on prices.
2. Domestic Supply Outlook Turning Loose
Recent news of large-scale auctions of China's reserved soybeans has raised expectations for an overall increase in domestic edible oil supply. Although this directly impacts soybean oil, substitution effects and sentiment spillovers within the oilseeds complex mean palm oil cannot remain immune, following soybean oil's downward trend.
3. Lack of Effective Demand-side Boost
Despite marginal positive news such as "Germany delaying its ban on palm oil-based biofuels to 2027," its actual impact on demand remains limited and distant. Currently, both international buyers (e.g., reduced purchases by India) and domestic end-users remain cautious ahead of large-scale pre-holiday restocking.
III. Key Support Levels and Potential Variables
Despite the bearish sentiment, there are still support factors.
The BMD palm oil price has strong technical support around the MYR 4,000 per tonne mark (approximately Yuan 8,300-8,400 per tonne), which is widely regarded as the medium to long-term fair value range. Additionally, firm international prices have led to persistently deep import losses for China, limiting the downside for domestic prices and future import volumes from a cost perspective. This explains the relative strength of domestic spot basis levels recently.
Market attention has shifted to "how high inventory will be digested." Key points to monitor include (1) Whether Malaysia's export data for the second half of December can show improvement; (2) Whether major producing countries (Indonesia, Malaysia) will introduce new export stimulus policies; and (3) The timing and intensity of pre-holiday restocking demand in China ahead of the Lunar New Year and India ahead of Ramadan.
IV. Market Outlook
In the short term, the palm oil market has entered a phase of weak consolidation and bottom-seeking following the "realization of negative factors." Until there are tangible signs of export recovery, high inventory will act as a "Sword of Damocles" hanging over the market, persistently capping any price rebounds. The immediate support for the Dalian main contract lies around Yuan 8,500 per tonne, with a more critical support level corresponding to the MYR 4,000 mark (Yuan 8,300-8,400 per tonne).
Trading Recommendation:
Investors are advised to maintain a cautious-to-bearish stance but avoid aggressive short positions near key support levels. The market is awaiting new catalysts to break the current weak equilibrium. Until a clear inventory inflection point emerges, any rebound is likely to face heavy selling pressure. Investors should closely monitor weekly export data and international trade activity to capture early signs of shifting market sentiment.
Written by Stacy Chen, chenyijuan@mysteel.com
