The current focus of the palm oil market is the diverging inventory trends between Malaysia and Indonesia, the two major producing countries. Malaysian palm oil inventories have climbed to their highest level in nearly five years, while Indonesian palm oil inventories have fallen to low levels. This divergence constitutes a prominent structural contradiction in the current market.
Indonesia's stepwise adjustments to export taxes are the core driver behind this inventory divergence. During the implementation of the sixth tax bracket, Indonesia's palm oil export tax stood at USD 74/ton, offering a significant cost advantage over Malaysia's FOB palm oil prices. In 2025, the seventh-tier tax of $124/ton was applied only in September and October, while other months maintained lower rates. This created a synergistic effect between robust biodiesel demand and favorable exports, resulting in an extreme divergence: Indonesia's palm oil inventories plummeted to low levels, while Malaysia's remained elevated.
Historical analysis reveals that the 2022 palm oil market trajectory closely mirrors the current situation, characterized by diverging inventories among major producers and clear expectations for inventory drawdowns. In 2022, Indonesia implemented a series of export restrictions—including Domestic Market Obligation (DMO) and Export Quota (DPO)—to control domestic edible oil prices. This not only led to rapid accumulation of domestic palm oil inventories but also resulted in a temporary absence of Indonesian palm oil exports from the global edible oil trade. As Indonesia subsequently entered an active destocking phase, its palm oil regained global export market share through price competitiveness, forming a divergent pattern of “Indonesia destocking, Malaysia stockpiling” that closely mirrors the 2025 inventory characteristics.
By December 2025, Malaysia's palm oil inventory reached 3.05 million tons, yet the seasonal production decline inflection point emerged, fueling market expectations for inventory drawdown. The 2026 Ramadan period begins on February 18, with Eid al-Fitr falling on March 19—earlier than usual. India's oil procurement demand will provide robust support for Malaysian palm oil exports, potentially accelerating inventory drawdowns. Additionally, Indonesia will impose a 12.5% special export tax on palm oil starting in March. Anticipation of this policy may trigger advance procurement, with shipments scheduled for March and beyond likely concentrated in February. This could indirectly boost Malaysian palm oil exports and accelerate inventory drawdown.
Notably, Indonesia's palm plantation confiscation policy may indirectly impact global palm oil inventory dynamics. Should Indonesia persist with this policy through 2026, its palm oil production could decline. Regarding global oil demand growth, the U.S. will announce its 2026-2027 Renewable Fuel Obligation (RVO) for biodiesel blending in early March. Based on market expectations and our calculations, assuming neutral assumptions for both blending targets and small refinery exemptions, this is expected to add 3-4 million tons of demand for U.S. soybean oil, potentially elevating the global price benchmark for vegetable oils.
Overall, market focus will shift to Malaysia's palm oil inventory drawdown progress. Supported by expectations of increased demand during India's Ramadan and for biodiesel from U.S. soybean oil, Malaysia's palm oil inventories are likely to continue declining. Meanwhile, Indonesia's low inventory situation is unlikely to change in the short term. The inventory dynamics in both major producing countries provide phased support for palm oil prices.
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