This article first appeared in Forum, The Edge Malaysia Weekly on May 4, 2026 - May 10, 2026

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 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.

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.

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.

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.

Beyond policy shifts, physical trade flows are also under pressure. Shipping disruptions linked to instability in the Strait of Hormuz and the Red Sea have increased risks for vessels, driving up war-risk insurance premiums and forcing rerouting of cargoes.

Malaysia’s exports to the Gulf region — accounting for about 3% of total shipments — have been particularly affected. Cargoes originally destined for ports in the Persian Gulf have been diverted to alternative hubs in the region.

At the same time, Saudi Arabia’s Red Sea ports, including Jeddah and Yanbu, continue to operate, while Oman’s Sohar and Salalah ports are emerging as key alternative distribution points.

However, these adjustments come at a cost. Freight and insurance rates have more than doubled since tensions escalated, adding further pressure to already volatile markets.

While supply-side pressures are intensifying, demand is beginning to soften in some regions.

In Sub-Saharan Africa, buyers are delaying purchases amid heightened price volatility, with a slowdown expected from the second quarter. Across Asean, demand remains relatively stable, but buyers are adopting a more cautious, hand-to-mouth approach.

In India, palm oil continues to trade at a discount of US$100 to US$180 per tonne to competing oils, supporting demand. However, competitively priced soybean oil from China is starting to gain market share.

Meanwhile, China’s imports of Malaysian palm oil are weakening, reflecting a longer-term shift towards processed palm products where Indonesia holds a competitive edge. Although Malaysia’s exports to the country rose 77% year on year (y-o-y) in 1Q2026, volumes remain below 2020-2024 levels.

The current market environment echoes past disruptions such as the Covid-19 pandemic and the Ukraine conflict — but with important differences.

Unlike Covid-19, when prices initially softened before rising, or the Ukraine war, which directly disrupted sunflower oil supply, the current shock is being driven primarily by energy markets.

Higher fossil fuel prices are strengthening biodiesel economics, increasing demand for palm oil and supporting prices. At the same time, geopolitical risks are disrupting logistics, raising costs and creating uncertainty for buyers.

The global palm oil market is entering a more constrained and volatile phase.

Malaysia’s export performance remained strong in 1Q2026, rising 29% y-o-y to 4.1 million tonnes, with gains recorded across all regions except the Americas. North Africa, mainly Egypt, posted the strongest growth at 94%, followed by South Asia (74%), Other Europe and Central Asia (47%), Asia-Pacific (24%) and Sub-Saharan Africa (20%). Growth in the Middle East and EU27 was more moderate at 8% and 1% respectively.

Looking ahead, export momentum is likely to moderate in the second quarter as supply-side and logistical disruptions begin to take effect. In parallel, buyers are adopting a more cautious stance amid heightened price volatility. As a result, full-year export projections are being revised downward, with Malaysia’s 2026 exports now expected to range between 15.7 million and 16.0 million tonnes.

Against this backdrop, demand development and market diversification are becoming more critical. The Malaysian Palm Oil Council (MPOC) is intensifying engagement efforts across traditional, growth and emerging markets to reinforce demand resilience and expand market access.

This includes a coordinated pipeline of market engagements across key regions. In April, MPOC hosted a delegation of 35 buyers from Central Asia for a four-day trade networking visit to Malaysia, aimed at building new commercial linkages. This will be followed by the Malaysian Palm Oil Forum in China in May, and a subsequent forum in Kenya targeting East African buyers, as part of a broader effort to deepen engagement across established and high-potential demand centres.

As Southeast Asian producers channel more palm oil into domestic energy use, global importers are likely to face increasingly limited supply options.

In a market shaped by conflict, policy intervention and logistical disruption, palm oil is no longer just an agricultural commodity — it is fast becoming a strategic energy asset.

Belvinder Sron is CEO of the Malaysian Palm Oil Council

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