The reaction of Chinese markets, when trading reopens on October 8 after a three-day holiday, will play a big part in whether Kuala Lumpur palm oil futures can sustain a bounce from three-year lows.

The benchmark December contract in Kuala Lumpur, the world's most watched market for palm oil trading, revived on Wednesday to post gains of 5% at one point, after falling early on to a fresh three-year low.

The intraday low of 2,230 ringgit a tonne was the weakest since November 2009, and took nearly to 12% the vegetable oil's price collapse so far this week.

And many analysts remain sceptical over whether the vegetable oil can recover in the face of rising Malaysian inventories, swollen by soft export demand at a time when production is around its seasonal high.

The trend of output outpacing exports will "continue through the fourth quarter, keeping inventory levels above 2m tonnes, a psychological range seen as denoting an ample supply of crude palm oil in the market", Malaysia-based Kenanga Investment Bank said.

"Hence, the crude palm oil price upside should be limited."

Demand signal

At Australia & New Zealand Bank's Singapore operations, ag commodity strategist Victor Thianpiriya flagged the importance of signals that lower prices are encouraging orders from end-users – which have yet to be witnessed.

"We need to see some sign of a demand increase being encouraged by lower prices," Mr Thianpiriya told Agrimoney.com.

"We have not seen that yet," raising the importance of Malaysian palm export data from cargo surveyors, the next of which are due on October 10.

Chinese investors

However, more immediately, the reaction of futures on Dalian exchange to the latest price falls, with Chinese markets reopening on October 8 after being closed for National Day and mid-Autumn Holiday celebrations.

Signally, this week's tumble in Kuala Lumpur futures has been accompanied by a rise in open interest, signalling that more is in play than fund liquidation of long positions.

"We have seen more activity than there is normally on the Bursa Malaysia," Mr Thianpiriya said.

This looks in part "down to hedging by Chinese through the Bursa rather than through the Dalian, with the Dalian closed".

How these positions react when the Dalian reopens looks set to provide a key signal to Kuala Lumpur trading, he said.

China is, with the European Union and India, a major importer of palm oil.

Longer-term outlook

Further ahead, Malaysian supply and demand fundamentals imply that palm oil prices should stage some recovery.

While the country's palm inventories look likely to end this year somewhere near the levels of 2.2m tonnes reached at the close of 2009, supporting the idea of prices trading at three-year lows, other factors indicate higher values.

Oil, to which prices of palm oil are related through its use in biodiesel, "was trading at $70 a barrel", with values of rival vegetable oil soyoil, "lower than now too", Mr Thianpiriya said.

"The problem is that the palm oil market in Indonesia is quite opaque. And everything we hear anecdotally is bearish."

Indonesia is the top palm oil producing and exporting country, ahead of Malaysia.

Bursa Malaysia's December palm oil contract closed 4.3% higher at 2,351 ringgit a tonne.

An earlier version of this story contained an incorrect reopening day for the Dalian exchange. We apologise for this error