A surprise drop in Malaysian palm oil output and a move by the world's top two producing countries to scrap some palm export duties are likely to give legs to a recovery in prices of the tropical oil, industry players said.

Benchmark palm futures sank 27 per cent in the first eight months and hit a 5-1/2 year low of 1,914 ringgit ($586.9) per tonne in early September as record supplies of competing oilseeds and strong output in the top palm growers Indonesia and Malaysia spooked investors.

But with exports picking up this month after the duty cut, losses for the year have shrunk to 17 per cent and prices could rise amid signs that Malaysian output will shrink in September.

"We are looking at a drop in September crude palm oil output which was not expected earlier, it could be due to extreme heat that we saw earlier this year but it's not clear," a Kuala Lumpur based broker said.

"The arrival of FFBs (fresh fruit bunches) has been very slow. It is expected to pick up in October but we are not sure at this stage," said the broker, who expects production to drop by at least 5 per cent from August.

The drop in output could be bigger at around 10 per cent, bringing down the stocks at the end of September to around 1.95-1.97 million tonnes, he said, from the current more than one-year high level of 2.05 million tonnes.

The Malaysian Palm Oil Association estimated palm oil production fell about 12 per cent between Sept. 1-20 from a month ago, indicating output may have lost steam after surging 22 per cent to 2.03 million tonnes in August.

Peninsular Malaysia, which accounts for about half of the country's total production, may see a drop in output in September after recording a stronger-than-expected rise in August, some planters said.

"It could be that yields in Peninsular Malaysia were high in August, and it may dip a bit in September and October. For the second half of October it might come back up again," said Puru Kumaran, Chief Financial Officer at Malaysia-based planter IJM Plantations Bhd.

The slightly bullish turn to supply fundamentals and a pick-up in exports have trickled down to prices, which are now headed for a 14 per cent rise this month - their biggest monthly gain since April 2009.

"The zero tax changed the scenario," said Chandran S., a palm trader at LT International Futures. "It put a stop to all bearish fundamentals - the good soybean crop supply, lower crude oil prices, slowing Chinese economy - and prices turned up."

Cargo surveyor data showed that Malaysia's shipments of crude palm oil nearly doubled between Sept. 1-25 compared to the same period a month ago, after the country removed the export tax for the two months to October.

Indonesia has followed suit and removed its crude palm oil export tax for October.

While some market players remained cautious about the outlook for demand, citing the huge supply of rival oilseeds which could channel food and fuel demand away from the palm, there are others who see prices going up from here.

"Next two weeks prices will stay supportive, between the lower end of 2,100 ringgit, and higher side of 2,250 ringgit or 2,300 ringgit," Chandran said.

"The lower production, with good exports and supportive technical charts may lead prices higher and higher."

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