HwangDBS Research expects palm oil exports this month to recover 22 per cent month-on-month to 1.664 million tonnes to replenish the stock ahead of the Hari Raya Aidilfitri festive season.
"As the global soyabean export availability eases and reserves are depleted, we expect China's palm oil demand to return in the fourth quarter," it said in a research note.
At end-July, palm oil inventory jumped 18 per cent month-on-month to 1.999 million tonnes, as exports fell 15 per cent to 1.297 million tonnes.
"Combined shipment to China and India dwindled by 229,000 tonnes, representing the bulk of the aggregate drop.
"We believe the decline in shipment to India is temporary, due to higher crude oil prices in early July," the research house said.
In addition, HwangDBS foresees August's output to pick up in line with the seasonal uptrend to 1.759 million tonnes although this may be slightly offsetted by the Hari Raya holidays.
"We believe there are downside risks in palm oil output until the first half of next year should the El Nino weather condition materialises," it said.
HwangDBS recommends investors accumulate Bumitama Agri and Genting Plantation as these counters should continue to outperform their peers due to higher long-term volume growth expectations.
Meanwhile, Maybank IB Research said the tight US soyabean oil supply due to drought will provide price support for crude palm oil at RM3,000 a tonne in the second half of this year.
"We maintain 'neutral' call for this sector, with Sarawak Oil Palms as our top buy for its attractive valuations on top of strong growth prospects," it said.
It retained its average crude palm oil price average selling price at RM3,150 a tonne this year and RM3,000 a tonne each for 2013 and 2014, respectively.