My Say: Energy shock and conflict tighten global palm oil supply
06/05/2026 (The Edge Malaysia) - Rising geopolitical tensions between the US and Iran are sending shockwaves through global commodity markets, triggering an energy-driven supply squeeze that is rapidly reshaping the outlook for palm oil.
At the heart of the disruption are threats to key maritime routes, particularly the Strait of Hormuz and the Red Sea. These critical arteries for global energy and commodity trade have come under increasing strain, pushing fuel prices sharply higher. Over the past month alone, gasoil prices have surged by 86%, while crude oil has climbed 31%.
This energy shock is now feeding directly into vegetable oil markets, with palm oil emerging as one of the biggest beneficiaries.
Palm oil gains as biofuel economics shift
Palm oil prices have rallied strongly in recent weeks, underpinned by their growing link to the energy complex.
Since the escalation of the West Asia conflict on Feb 28, crude palm oil futures on Bursa Malaysia had risen 11% as at April 17, while physical prices in Europe were up 10%. Soybean oil also strengthened, gaining 12% in the US and 4% in Argentina over the same period.
However, other major vegetable oils such as sunflower and rapeseed showed modest gains, reflecting weaker policy support and less direct exposure to biofuel demand.
The key driver is the sharp narrowing in the palm oil-gasoil (POGO) spread, which tightened by 79% — from US$310 per tonne on Feb 23 to US$24 per tonne on April 17. As gasoil prices outpace palm oil, the economics of biodiesel production have improved significantly, making palm oil a more attractive feedstock.
US biofuel policy adds further support
Policy developments in the US are reinforcing these market dynamics. On March 26, the Environmental Protection Agency issued its final rule setting renewable volume obligations under the Renewable Fuel Standard (RFS) for 2026 and 2027. The agency confirmed higher blending targets than those proposed in June last year, despite rising consumer fuel prices linked to ongoing geopolitical tensions, including the Iran conflict.
The RFS remains a key driver of demand for clean fuels, requiring refiners to either blend specified volumes of biofuels or purchase compliance credits — known as Renewable Identification Numbers — based on their gasoline and diesel output.
Higher US biofuel mandates are expected to increase demand for domestically produced feedstocks such as soybean oil, tightening global vegetable oil supplies. This, in turn, is likely to trigger substitution effects across the wider oils and fats complex, lending additional upward support to crude palm oil prices.
A strategic commodity beyond food
Palm oil, the world’s most widely consumed vegetable oil, plays a dual role in global markets. It is a staple ingredient in food products as well as a key input in consumer goods.
Increasingly, however, it is also an energy commodity. Indonesia has expanded biodiesel blending mandates over the past decade, tying palm oil demand more closely to fuel markets. This dual function means that geopolitical shocks — especially those affecting oil prices — can have immediate and far-reaching effects on palm oil supply and demand.
Southeast Asia prioritises energy security
Governments across Southeast Asia are accelerating efforts to secure domestic energy supply, with biodiesel policies playing a central role in reshaping palm oil demand.
Indonesia is preparing to implement a B50 biodiesel mandate in July, initially targeting the public service obligation (subsidised diesel) segment. This phase alone could absorb an additional 1.5 million tonnes of palm oil annually. The non-subsidised segment is expected to adopt B50 by 2028. Once fully implemented, total biodiesel consumption could reach 15 million to 16 million tonnes, significantly tightening exportable supply.
Thailand has adopted a more immediate intervention. Since April 7, exports of crude palm oil require government approval, with controls expected to remain in place for up to one year. The measures are complemented by B20 blending under its biodiesel subsidy programme. Although Thailand is a relatively small exporter, the policy underscores a broader regional shift — energy security is increasingly taking precedence over export expansion.
Malaysia is also advancing its biodiesel strategy, with plans to raise the mandate from B10 to B15, beginning with B12 — a level that can be supported by existing infrastructure without major upgrades. Malaysia has maintained its B10 mandate since 2019, largely due to historically high crude palm oil prices, but there is considerable scope for expansion given installed biodiesel capacity of 2.4 million tonnes and utilisation rates below 50%. The policy supports domestic palm oil demand while reinforcing the government’s longer-term commitment to biodiesel expansion and enhances energy security by reducing dependence on imported diesel, particularly as domestic fuel prices have surged by nearly 90% — from RM3.15/litre on Feb 27 to RM5.97/litre on April 17 amid escalating tensions in West Asia. A transition toward B15 represents a strategic response to global fuel market volatility, with limited impact on retail fuel prices, while potentially reducing reliance on imported diesel by about 5% and providing a more stable and predictable source of domestic demand.
The overall impact on palm oil supply and demand will depend on the pace of implementation. Between 2020 and 2025, Malaysia’s biodiesel production averaged 1.05 million tonnes, with exports at around 300,000 tonnes, implying domestic consumption of about 700,000 tonnes annually under the B10 mandate.
A shift to B12 would increase domestic usage by an estimated 140,000 tonnes, while a move to B15 would require an additional 300,000 tonnes. Even under B15, biodiesel consumption would account for only 4% to 5% of Malaysia’s total palm oil production, suggesting a relatively modest impact on export availability.
From a price perspective, palm oil markets remain supported by elevated crude oil prices and stronger biodiesel demand, underpinned by a favourable POGO spread. Across major producing countries, rising domestic consumption is gradually tightening exportable supply.