Palm oil futures tumbled 4% to amongst their lowest of the last four months as data showing a surprise rise in Malaysian inventories compounded price fears sparked by forecasts from a leading analyst.
Palm oil for May delivery, the benchmark contract, fell to 3,441 ringgit a tonne before staging some recovery to stand 3.5% lower at 3,459 ringgit a tonne in closing deals.
The decline followed data from the Malaysian Palm Oil Board, Malaysia's palm industry regulator, showing stocks of the vegetable oil in the world's second biggest producer and exporter of the vegetable oil rising in February for the first time since October.
The month-on-month increase, of 60,000 tonnes to 1.48m tonnes, defied traders' expectations of a decrease in inventories, to 1.38m tonnes.
And, in a further sign of a loosening market, the board revealed an accelerating fall in exports, which fell by 8.5% to 1.11m tonnes, a third successive month of decline.
Data from cargo surveyors signalled that the decline is continuing in March, with Societe Generale de Surveillance pegging shipments down 16.6% so far this month, and Intertek Testing Services estimating the drop at 19%.
'Prices to fall'
The weak data played on nerves frayed by a forecast from Thomas Mielke, executive director of analysis group Oil World, that current palm oil prices were "not sustainable".
The weather setbacks, linked to the La Nina, behind the rise of 30% in prices over the last year, had eased in recent weeks in Malaysia and Indonesia, the top producing country.
Malaysian production will rise by some 5% to 17.8m tonnes this year, with Indonesia's output soaring 8% to 23.7m tonnes.
The vegetable oil will "come under price pressure in the medium term, as output and stocks are recovering", Mr Mielke said.
"[Palm oil] futures should gradually fall… to an average price of 2,850 remninbi per tonne in October-to-December 2011."
However, analysts at Australia & New Zealand Bank on Thursday cautioned against expectations of continued price weakness for now, noting that stocks, as a proportion of exports, remained at a historically low level.
"At the end of February, Malaysia had enough palm oil stocks to last only one month of exports," and without earlier-than-usual start to a seasonal uptick in production, "we view the situation as bullish for the near term".
"Despite what may seem to be a bearish set of figures, the Malaysian palm oil balance remains precariously tight," the bank said.
Mr Mielke was also more upbeat over longer-term price prospects, saying plantings in Indonesia had slowed down "far behind what the world will require in the years ahead".
Plantation growth, which has been slowed by environmental concerns, needs to reach 350,00-400,000 tonnes "to satisfy future world demand", which will reach 62m-63m tonnes in 2015, and 76m-77m tonnes in 2020.
Demand last year was 45.5m tonnes.