04/10/2012 (Reuters) - Malaysian palm oil futures ended up on Wednesday on bargain hunting after prices dropped to their lowest in nearly three years earlier in the session, although traders said the recovery could be short-lived as fundamentals remained weak.

Palm oil, which on Tuesday suffered its steepest daily fall since the 2008 financial crisis on weaker-than-expected demand and rising stocks, extended losses in early trade to hit 2,230 ringgit per tonne, a level not seen since November 2009.

But the lower prices lured buyers back to the market.

The benchmark December contract had surged 4.3 percent to 2,351 ringgit ($769) per tonne by the close, its biggest daily percentage gain since October 2010. Palm oil has shed more than 15 percent over the last five sessions.

"When prices dropped so sharply, the market was severely oversold," said a trader with a local commodities brokerage in Malaysia. "Today maybe there will be some rebound or technical pullback. I don't think it will last that long, but it will try to cover whatever gaps there are in technical charts."

Total traded volumes stood at 50,577 lots of 25 tonnes each, double the usual 25,000 lots as the previous day's plunge enticed traders.

Palm oil prices, down almost 26 percent so far this year, are expected to stay under pressure due to high inventory levels as production outstrips demand.

Traders and plantation owners are bracing for September inventory levels in Malaysia to surpass August's 10-month high, with palm oil exports in September hovering around 1.4 million tonnes, barely moving from a month ago. 

"We expect this trend (of production outpacing exports) to continue through the fourth quarter, keeping inventory levels above 2 million tonnes, a psychological range seen as denoting an ample supply of CPO (crude palm oil) in the market," Alan Lim Seong Chun, research analyst with Malaysia's Kenanga Investment Bank, wrote in a note to clients.     

"Hence, the CPO price upside should be limited."

In a bearish sign for palm oil, crude oil prices fell on Wednesday, as weak data from Europe and China dimmed the outlook for demand, while Europe's festering debt crisis added to the gloom.

In other vegetable oils markets, U.S. soyoil for December delivery slipped 0.3 percent in late Asian trade. The Dalian Commodity Exchange will resume trading on Oct. 8 after a week-long holiday in China. 

  Palm, soy and crude oil prices at 1009 GMT

  Contract        Month    Last   Change     Low    High  Volume
  MY PALM OIL      OCT2    2200  +117.00    2132    2200      48
  MY PALM OIL      NOV2    2269   +94.00    2148    2295    3486
  MY PALM OIL      DEC2    2351   +96.00    2230    2387   26397
  CHINA PALM OLEIN JAN3    7186   +10.00    7172    7244  220106
  CHINA SOYOIL     JAN3    9278    +6.00    9250    9328  305268
  CBOT SOY OIL     DEC2   50.55    -0.14   50.06   50.72   10596
  NYMEX CRUDE      NOV2   91.40    -0.49   91.09   91.82   17156

  Palm oil prices in Malaysian ringgit per tonne
  CBOT soy oil in U.S. cents per pound
  Dalian soy oil and RBD palm olein in Chinese yuan per tonne
  Crude in U.S. dollars per barrel
 ($1 = 3.056 ringgit)