Investors should "buy the dip" in palm oil futures, Standard Chartered said, blaming a slump to three-year lows this week was based on a mistaken interpretation of output data, and foreseeing a jump of one-third in prices ahead.

"There are overwhelming indicators to suggest that crude palm oil is on the cusp of a move higher," StandChart analyst Abah Ofon said, as Kuala Lumpur futures on Friday extended their recovery, closing 2.7% higher at 2,415 ringgit a tonne.

Mr Ofon acknowledged "a number of" downbeat developments for prices, whose near-20% slump over the past month has been blamed on soft Malaysian exports at a time when production should be at its seasonal high.

However, "the bearish sentiment is overdone.

"Prices are due for a significant upward correction."

Supplies overestimated 

Mr Ofon said that fears over Malaysian production may be overdone, despite a rise in yields to above-average 1.69 tonnes per hectare in July, with production actually peaking in August rather than, as usual, in October.

It was a "tall order" to meet official forecasts of full-year output of 18.4m tonnes, "considering that oil yield tends to moderate in the latter half of the October-to-December quarter", he said.

Furthermore, inventories in Indonesia, the world's biggest producer and exporter, will fall by some 1m tonnes by the close of 2012 from levels of 3.2m tonnes at the end of August.

Deep discounts

As extra fillips, low prices are likely to spur demand, particularly from China ahead of the Lunar New Year celebrations in February, while comparison with mineral and vegetable oil markets supports the case for buying palm oil too.

Against gasoil, to which palm oil is correlated as a feedstock for biodiesel plants, the vegetable oil's price discount "is approaching a historical low and is near the level at which we would expect the market to correct", Mr Ofon said.

The discount to rival vegetable oil soyoil widened by 27% in the week to Wednesday, when Kuala Lumpur palm oil for December hit 2,230 ringgit a tonne, the lowest for a benchmark contract since November 2009.

"Risks to prices are to the upside. While the timing of this move is uncertain, we firmly expect to hit our 3,250-ringgit-a-tonne target in the [current] fourth quarter."

A value at that level would represent an uplift of 34% over the December lot's closing price on Friday, or of 29% over the closing price of the February lot, which will take over as the benchmark contract later in the quarter.

Record inventories?

However, some other analysts have taken a more cautious view of price prospects.

Australia & New Zealand Bank has flagged the need for confirmation that low values have stimulated purchases of the vegetable oil and, shorter-term, highlighting the importance of signals from Dalian palm oil futures when Chinese markets reopen on Monday from a week-long holiday.

And official data on Wednesday will show Malaysian palm oil inventories hitting a record 2.46m tonnes, investors believe, according to a ThomsonReuters poll.

Production is seen hitting nearly 2.0m tonnes last month, well above exports of some 1.5m tonnes.