Pelletizing is effective in compacting cellulose fibres, but it also causes fibre breakage and poor dispersion due to increased hydrogen bonding. This study investigated whether fibre dispersion and length could be improved by the addition of a lubricant, a commonly used composite processing aid, into cellulose pellets, or by using pelletized fibres that have not been completely dried to reduce hydrogen bonding. Cellulose pellets with different lubricant and moisture contents were prepared and compounded using twin-screw extrusion with polypropylene with 5 wt% fibre and 50 wt% fibre contents. The fibre dispersion, morphology and mechanical properties of the prepared composites were analysed. Dispersion and composite strength were improved with the addition of 4–6 wt% of lubricant while moisture had a negative effect on both properties. This study demonstrated that pelletization in the presence of a lubricant is a promising way to compact cellulose fibres and enable their continuous processing into biocomposites with improved mechanical properties.