14/08/2012 (Reuters) - Malaysian crude palm oil futures tumbled to a near ten-month low on Monday, mirroring losses in grains and oilseed markets where traders booked profits from a U.S. drought-driven rally and as rising local stocks weighed on sentiment.

The monthly supply and demand report by the U.S. Department of Agriculture (USDA) forecast a lower soybean output on late Friday, which is slightly bullish for palm oil, but traders said the downgrade had been factored in.

The market continued to price in improving production and a lacklustre demand that pushed Malaysia's palm oil inventory level to a five-month high of nearly two million tonnes in July.

"Global vegetable oils are better supplied than global oilseeds and we therefore expect prices to underperform. The price discount of Bursa palm oil to CBOT soyoil averaged a large $223 a tonne in July and did not spark strong export demand," Rabobank analysts said in a note to clients.

"As a result, we expect this spread to continue to move wider as bullish sentiment remains in CBOT prices with the worst drought in more 50 years continuing to hamper U.S. soybean production," they added.

The benchmark October palm oil futures on the Bursa Malaysia Derivatives Exchange dropped nearly 2 percent to 2,825 Malaysian ringtgit -- a level unseen since Oct 20. last year. The contract later settled down 0.4 percent to 2,871 ringgit.

Palm oil ended the previous week with a 1.2 percent loss, the fifth consecutive week that the edible oil is in the red.

Total traded volumes stood at 29,649 lots of 25 tonnes each, just slightly lower than the usual 30,000 lots.

On the technicals front, palm oil will retest a support at 2,838 ringgt, a break below which will trigger a fall to 2,760 ringgit, Reuters market analyst Wang Tao said.

Malaysian palm oil stocks in July touched their highest since February at close to two million tonnes, almost in line with market expectations, industry regulator the Malaysian Palm Oil Board said on Friday.

And the build up in stocks could continue as exports of the edible oil hovered around the 350,000-tonne level compared to the 363,975 tonnes reported by cargo surveyor Intertek Testing Services a month ago.

Traders are hoping that the recently announced tax-free crude palm oil export quotas of 2 million tonnes could help bolster demand and reduce stocks in coming months.

Market players will be looking out for the next export data due on Wednesday for further clues on consumption trends.

Oil rose above $114 per barrel on Monday to the highest in more than three months as concern about supplies and hopes that governments will roll out more stimulus measures trumped signs of weakening fuel demand.

In other vegetable markets, by 1122 GMT, the most active U.S. soyoil contract for December delivery had lost 0.7 percent and the most active January 2013 soyoil contract on the Dalian Commodity Exchange had gained 0.4 percent.

($1=3.118 Malaysian ringgit)