Prices on Friday slumped to the lowest since Dec. 21 as official data pointed to record stocks at 2.63 million tonnes in December, going against expectations of a slight drop.
But traders are hopeful that inventories may soon fall due to the heavy rains that are currently disrupting the harvest of a crop that is expected to decline due to seasonal factors.
"The market is trying to make a comeback on the premise that production dropped over the last 10 days," said a trader with a foreign commodities brokerage in Malaysia. "However, demand is anaemic and we may have an end-stock of around 2.7 million tonnes by end-January."
By the midday break, the benchmark March contract on the Bursa Malaysia Derivatives Exchange had gained 0.8 percent to 2,387 ringgit ($792) per tonne. Prices dropped to a low of 2,332 ringgit on Friday.
Total traded volume stood at 14,452 lots of 25 tonnes each, higher than the usual 12,500 lots.
Technical analysis shows palm oil is expected to retest support at 2,334 ringgit per tonne, as a downtrend from the Jan. 2 high of 2,524 ringgit has not completed, said Reuters market analyst Wang Tao.
Malaysia will set export tax for crude palm oil at zero percent in February, unchanged from January, a government minister said on Monday. An official announcement is expected on Tuesday.
Traders are awaiting Malaysia's Jan. 1-15 exports data due to be released on Tuesday after a disappointing showing on the first ten days despite the zero percent export tax.
Exports fell as much as 34 percent for the period compared to a month ago, cargo surveyor data showed.
Malaysian crude palm oil production this year will rise marginally to 18.9 million tonnes compared to 18.8 million tonnes in 2012 as yields improve, an industry regulator said on Monday.
Brent crude rose to near $111 a barrel on Monday as fears of disruption of supply from the Middle East resurfaced amid growing optimism for a revival in demand growth as the world's biggest economies show signs of steady recovery.
US soyoil for March delivery edged up 1 percent in early Asian trade, lending support to competing palm oil. The most active May soybean oil contract on the Dalian Commodity Exchange was up 0.2 percent by the midday break.