As a significant global source of vegetable oil, the oil palm’s ability to withstand abiotic stresses, particularly drought, is crucial for sustainable agriculture. This is especially significant in tropical regions, where water scarcity is becoming more common. Nitrogen, a vital nutrient, plays an essential role in various physiological and biochemical processes in plants, directly influencing growth and stress tolerance. This study investigates the interaction between nitrogen sources (ammonium vs. nitrate) and drought stress in oil palm (Elaeis guineensis) seedlings, which is critical in enhancing productivity in this economically important crop. The experiment evaluated five commercial oil palm genotypes, which were supplied with nitrogen solutions (15 mM NH4+ or NO3−) for 46 days, followed by 30 days of progressive drought. The results showed that drought conditions universally reduced the biomass, with ammonium-fed plants exhibiting greater shoot biomass sensitivity than nitrate-fed plants. Drought also significantly decreased the chlorophyll a, PhiPS2, and root-reducing sugar levels—critical indicators of photosynthetic efficiency and overall plant health. The effects on the root architecture were complex, with ammonium nutrition differentially influencing the lateral root length under well-watered versus drought conditions, highlighting nitrogen forms’ nuanced role in root development. Importantly, substantial genotypic variability was observed in most traits, affecting the responses to both the nitrogen source and drought stress. This variability suggests that certain genotypes may be better suited to cultivation in specific environmental conditions, particularly drought-prone areas. In conclusion, this study underscores the intricate interplay between nitrogen nutrition, genotypic variability, and drought tolerance in oil palm seedlings. These findings highlight the need to integrate these factors into agricultural management strategies to improve resilience and productivity in oil palm plantations.