The benchmark September contract on the Bursa Malaysia Derivatives exchange ended MYR28 or 1.2% lower at MYR2,377 a metric ton after falling close to a week's low at MYR2,375/ton.
The downward correction was necessary to get prices back in line with fundamentals, traders said.
"Some investors have set up short positions on expectations prices are likely to fall further due to growing palm stocks in Indonesia and Malaysia," a Singapore-based trading executive said.
Southeast Asia's palm oil stocks likely total around the high level of 3.6 million tons, traders in Malaysia and Indonesia said, estimating that Malaysia and Indonesia's output in June could rise by 15% and 20% on month,
respectively, contributing to the downward pressure on prices.
"Prices are definitely vulnerable to further declines given high volatility in the market now," said Chan Wei Siang, an analyst at Rabobank International's Food & Agribusiness Research and Advisory. "Global economic growth prospects are uncertain. On the production front, yields will also increase seasonally
going into the second half of the year...depressing prices."
Bearish fundamentals will likely limit any price gains for the rest of the week, traders said.
Soyoil and crude oil futures trading in the red during Asian trading hours also weighed on CPO prices.
At 1029 GMT, July crude oil on the New York Mercantile Exchange was trading $1.05 lower at $76.77 a barrel on Globex. July soyoil at the Chicago Board of Trade was trading 8 points lower at 37.97 cents a pound in electronic trade.
In the cash market, palm olein for August/September delivery was traded at $775/ton and $782.50/ton, October/November/December at $765/ton and $767.50/ton, free-on-board Malaysian ports, a Singapore-based broker said.
CME Group Inc.'s dollar-based CPO futures contract for September was $9.25 lower at $743.50/ton around 0947 GMT, with one lot traded. One lot is equivalent to 25 tons.
Rupiah-denominated August CPO futures on the Indonesia Commodity and Derivative Exchange ended 1.2% lower at IDR6,440 a kilogram, with three lots traded. One lot is equivalent to 10 tons. The September contract was trading 0.2% lower at IDR6,275/kg, with 223 lots done.
Open interest on the BMD was 78,095 lots, versus 77,443 lots Monday. One lot is equivalent to 25 tons.
A total of 12,268 lots of CPO were traded versus 12,738 lots Monday.
Closing BMD CPO futures prices in MYR/ton at 1000 GMT: Month Close Previous Change High Low Jul'10 2,450 2,476 Down 26 2,467 2,445 Aug'10 2,404 2,430 Down 26 2,427 2,401 Sep'10 2,377 2,405 Down 28 2,403 2,375 Oct'10 2,365 2,393 Down 28 2,385 2,365 -By Shie-Lynn Lim, Dow Jones Newswires; +603 2026 1233; firstname.lastname@example.org