Palm oil production in Malaysia could remain relatively weak, having fallen below market expectations for the first time in six months, and fostered a drop in the country's hefty inventories.

Malaysian palm output fell 19.1% last month, compared with January, according to the Malaysian Palm Oil Board, the sector regulator in the world's second largest producing, and exporting, country of the vegetable.

While some decline had been expected, in what is a seasonally weak period of the year, the drop far exceeded market expectations for a fall of less than 14%.

And it stoked concerns that oil palm trees might have suffered more severely from drought late in 2012 than had been evident in production data which has trended well above market estimates for the past six months.

'Bullish for prices'

"We estimate precipitation deficiencies occurred throughout the second half of 2012, with rainfall levels averaging 69% of normal, and lows at 59% of normal in October," Rabobank analysts said.

Typically, palm oil output bottoms out in February.-14.0%

A continued fall in production, at a time when exports usually pick up, could see Malaysia's palm stocks fall further from their record high of more than 2.6m tonnes reached in December.

Rabobank estimated April inventories at 2.2m tonnes, a level above the five year average but the lowest since August, and a figure that would be "bullish for Kuala Lumpur palm oil prices relative to current futures".

Export dynamics

Malaysian palm oil inventories fell 5.2% to 2.44m tonnes last month, in line with market expectations, with the bigger-than-expected fall in production matched by an unexpectedly-large drop in exports too, of 14.0%.

Exports to the important Chinese market fell 12% month on month to 237,000 tonnes, reflecting a build in port inventories, in part spurred by the introduction at the start of the year of tougher regulation on consumer edible oils.

"High stock levels, as well as the expected March rapeseed harvest, should cap a return to growth in Chinese imports until domestic stocks can be drawn down," Rabobank said.

However, exports to India, the top ranked palm oil importer rose 9%, and those to Europe by 40%.

"European imports should remain above usual levels in the coming months due to relatively low palm oil prices when compared to European vegetable oil prices," the bank said.

Market reaction

Hopes for shipments received a boost when Societe Generale de Surveillance revealed that its cargo surveyors had estimated Malaysia's palm exports rising 2.2% in the first 10 days of the month, compared with the same period of January.

Rival Intertek Testing Services estimated exports flat.

Palm oil prices closed 0.1% higher at 2,449 ringgit a tonne, well below their intraday day of 2,467 ringgit a tonne, but extending a winning streak to three days.

Late on Friday, the US Department of Agriculture had appeared to throw the market some bearish data, in lifted by 182,000 tonnes its estimate for world palm stocks at the close of 2012-13, a rise of 9.8% year on year.