Demand for palm oil has slumped as prices for the biofuel trade at a premium to hydrocarbon-based alternatives.
While all energy prices have dropped sharply because of COVID-19, palm oil has fallen less steeply than crude oil prices, as can be seen in the charts at the bottom of this article.
The price spread between palm oil and gas oil, the so-called POGO spread, is a widely watched metric in the Malaysian and Asian biodiesel community. With palm oil trading at a steep premium to gas oil prices, it is unlikely there will be discretionary biofuel blending activities for the time being. Palm oil has the highest oil yield of any oil crop, making it the cheapest vegetable oil used in biodiesel.
Recently, Malaysia postponed its nationwide rollout of its 20% biodiesel mandate until the country lifts its movement restrictions because of COVID-19. Similarly, Indonesia is delaying implementation of its 40% biodiesel blending program indefinitely because of the coronavirus pandemic. The two countries are the largest producers of palm oil, and Indonesia is the largest consumer.
While palm oil demand could increase when movement restrictions are removed, a drawdown of palm oil stocks from both Malaysia and Indonesia will be needed to support a sustained rise in the price. Demand indicators out of China are important to watch, as China is the second-largest importer of palm oil. Also key is the price spread between palm oil and soybean oil, a substitute product.
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