Looking ahead to the second half of the year, the oilseed complex is expected to become highly fragmented. On one hand, the US biodiesel policy provides a tangible, substantial demand increment for global oils and fats, with high profit margins and inter-product spreads likely to continue supporting prices. On the other hand, with the fading of crude oil's price influence, oils other than US soybean oil will find it difficult to generate upward momentum from their own fundamentals in the intermediate term. Consequently, oilseed markets are projected to remain choppy and range-bound in the latter half of the year. In the absence of a rebound in US soybean oil to support the overall complex, prices are likely to be weak within a consolidating range, though US soybean oil will moderate this downward pace.
Strategic Recommendations for Trading
Two primary trading strategies are suggested. First, consider a bull spread (buying nearby, selling deferred) in US soybean oil futures, capitalizing on the US biodiesel demand narrative. Second, look for opportunities to establish long positions in palm oil from late in the fourth quarter onward, targeting the potential impact of the "El Niño" phenomenon.
Global Supply and Demand Outlook
From a global annual supply and demand balance perspective, expectations for ending stocks and stock-to-use ratios for oilseeds and oils in the 2026/27 season are diverging. Oilseed stocks are expected to accumulate, while oil stocks are projected to see a slight drawdown. Due to the ample protein supply from oilseeds themselves and the anticipated biodiesel demand increment for oils in a high crude oil price environment, the price elasticity of oils is expected to remain significantly better than that of protein.
The primary increment in oilseed supply continues to come from soybeans. Apart from the concrete demand for US soybean oil, no independent supply-side drivers are visible for Chinese soybean oil in the 2026/27 season. Rapeseed supply has peaked, corresponding to a bottom in international rapeseed complex prices, though Chinese rapeseed oil prices still require adjustment through import crush margins. Overall, if prices reach the lower end of their range in the second half, rapeseed and palm oil remain suitable for long positioning.
Assessing Apparent Inventory Structures
Crude oil has elevated palm oil prices this year to levels not fully justified by corresponding inventory levels. Once the crude oil price driver fades, a corresponding price correction is expected. Global apparent oil inventories are likely to remain high in the third quarter, potentially accumulating further. Historically, inventory turning points are more common in the first quarter. Considering this year's demand increment from US biodiesel, the trajectory of apparent inventories may resemble 2023, with a peak expected in early Q4. Under optimistic conditions, a synchronized global inventory drawdown could begin then, corresponding to a potential price bottom for palm oil by late Q4, before transitioning into an El Niño-driven narrative.
Review of Key Oilseed Markets
Palm Oil: Crude Oil Introduces Volatility, Fundamentals Weaken
Production data from the first half suggests a significantly lower probability of a major Malaysian production increase in 2026. However, falling crude oil prices and shrinking biodiesel margins are also reducing demand. Due to highly questionable GAPKI data adjustments, Indonesian ending stocks appear exaggerated. Looking beyond absolute values at changes: if Indonesia cannot successfully implement its B50 mandate in the second half, the overall producing region will still face inventory accumulation pressure in 2026. Furthermore, under normal circumstances, El Niño does not affect current-season production, limiting supply-side expectations for H2. If B50 does not proceed as planned, palm oil will lack any independent positive drivers in the latter half of the year.
Malaysia: Reduced Production Growth Expectations, But Inventory Buildup Persists
Cumulative Malaysian production from January to May reached 7.385 million tonnes, up only 1.6% year-on-year. Assuming June production increases by only about 5% from May, H1 2026 production will be roughly flat with last year. Given that last year's Q3-Q4 production was not low, a significant production increase for 2026 seems unlikely. Consequently, year-end inventory expectations for Malaysia could shift from accumulation to drawdown. However, from now until early Q4, accumulation expectations remain, with overall stocks relatively high. Pure supply-demand fundamentals offer no effective positive driver. The current intensity of El Niño also does not suggest immediate production losses in the current season, meaning Malaysian origin fundamentals will not be a bullish factor for most of the second half.
Indonesia: Supply Data Unreliable, Focus Shifts to Demand
Indonesian data, from misaligned June-August 2025 production figures to mismatched January-February 2026 production and inventory data, has largely lost its reference value. Its production data shows an unusually high correlation with export data, suggesting GAPKI's statistical inventory samples fail to reflect actual stocks, leading to passive data adjustments. Therefore, Indonesia has little expectation of a significant production increase in 2026; it's more about inventory shifts. Actual 2026 production is likely flat with 2025, but actual stocks are certainly higher than reported. However, based on annual data projections, with support from biodiesel demand, Indonesia can still project inventory drawdown by year-end.
Weather: El Niño in Progress, Monitor Later Intensity
Current El Niño evolution forecasts suggest it will begin affecting weather in traditional impact zones from July. According to new NOAA intensity forecasts, there is a high probability it will develop into a very strong El Niño by November-December. If intensity measures drought severity, crops within the expected drought impact zone from September to next February include palm oil and Australian rapeseed, while flooding issues could affect South American soybeans. Focus on drought for Australian rapeseed starting August-September, and for palm oil, focus on the impact of strong drought in Q4 on current-season production and on production issues from June-September 2027.
Rapeseed: International Complex Pressure Nearing an End
Global rapeseed production for 2026/27 is forecast at 84.3 million tonnes, down from the record 85.6 million tonnes in 2025/26. However, no significant reductions are seen in major European or Canadian producing regions, and this year's El Niño is expected to have a lighter impact on Canada. The main reduction expectation lies in Australia. 2026/27 marks the first year of declining global rapeseed production after a peak. Although the reduction magnitude is limited, the price bottom formed earlier under bearish supply-demand dynamics is considered solid. With the added demand for rapeseed oil from US biodiesel and potentially larger-than-expected reductions in Australia, the international rapeseed complex is viewed as more likely to rise than fall.
Soybean Oil: Demand Gains Structural Support
The main issue with soybean oil is the mismatch in international price linkages. US biodiesel creates absolute demand for soybean oil, but regional demand outside the US struggles to capture this actual policy-driven demand, only benefiting from price effects. The actual demand increment is captured by Canadian rapeseed oil, imported used cooking oil (UCO), and imported finished products under high RINs prices. Therefore, even with robust international soybean oil production and demand and flat expected ending stocks, regional distribution is completely different. For example, Chinese, Argentine, and US soybean oil have distinct pricing references: Chinese prices align with the international floor, referencing export UCO and Indian palm oil import substitution; Argentine prices relate to US food substitution and international palm oil import substitution, carrying tax and freight premiums; US prices represent the international top, driven by biodiesel margins and corresponding inter-product spreads.
Demand Overview
India: Future Demand Potential Lacking
India's apparent demand from November to May fell 6% year-on-year. High oil and energy prices, along with domestic conservation initiatives, have significantly dampened palm oil demand during its typical peak season. Monthly imports have stabilized at 500,000-600,000 tonnes, with clear inter-oil substitution. The Indian demand theme may be difficult to trade this year. India's own inventory situation further weakens its subsequent demand potential. Overall and port palm oil stocks are high, compressing potential restocking space compared to later peak seasons, with soybean oil substitution also present. Overall, India is unlikely to provide the demand-driven themes seen in previous years.
China: Apparent Demand Stagnant, Latent Demand Emerging
Stagnant Chinese oil demand is a recurring theme. Conventional oil consumption shows little growth, possibly declining when excluding exports and certain special consumption. This year's extreme soybean-palm and soybean-rapeseed spreads, along with Chinese soybean oil exports, have somewhat boosted apparent soybean oil consumption. However, excluding these factors, domestic soybean oil consumption shows no real growth. Palm oil consumption has increased compared to last year, but includes unaccounted non-edible demand, representing a new consumption highlight. Projecting forward, at least until Q4, the three major oils are expected to continue accumulating stocks. With traditional demand offering no increment for an extended period, new demand or spread support will have to rely on biodiesel.
Biodiesel Sector Analysis
US Soybean Oil: Short-Term Rebound and Long-Term Spread Strategy
With the recent crude oil price decline and using pre-conflict US diesel prices and a relatively fundamental RINs price as references, the corresponding support range for US soybean oil is 67-70 cents per pound. Considering the latest 45Z model has incorporated land-use carbon emission subsidies, US soybean oil should find strong price support within this range. Regarding its future price trajectory and impact on international oils, its role will shift from raising the price ceiling to providing a floor. Further significant gains would require actual US soybean oil inventory drawdowns, tightening supply-demand, and synchronized strength across the oil complex. Therefore, the most suitable trade currently is a bull spread in US soybean oil futures.
Palm Oil Biodiesel: Consumption May Fall Short of Expectations
Based on public data calculations, Malaysia's B15 implementation in June could provide a biodiesel consumption increment of 200,000-250,000 tonnes in H2, a relatively small amount. Indonesia's B50 could provide a 3 million tonne annual increment, with an estimated H2 palm oil consumption increment of about 1.5 million tonnes. The issue is that while POGO spreads previously allowed for thinking in terms of biodiesel consumption ceilings, their current contraction means future Indonesian B50 implementation must be considered using a lower-bound estimate. Furthermore, Indonesia's latest policy provides a 3-month consumption buffer for remaining B40 stocks, effectively delaying B50 by three months. If POGO spreads still cannot provide profit by October, the actual biodiesel demand increment is likely to fall short of expectations.
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