The government announced the tax suspension on Friday and traders said the move will make Malaysian palm oil more competitive, especially in price sensitive markets such as India and China.
"We are going to see buying coming in from China ahead of the Lunar New Year. India will also restock in the first and second quarter of the year as they have low stock levels," said a Kuala Lumpur-based trader, who estimates that Malaysian palm oil exports could pick up 10-15 percent on a monthly basis.
Malaysia usually calculates a reference price each month to determine the crude palm oil export duty rate, whereby a price above 2,250 ringgit ($563) incurs a tax.
Its last calculated reference price for January was 2,623.31 ringgit per tonne, effectively incurring a 5.5 percent tax rate.
The minister of plantation industries and commodities Mah Siew Keong told a press conference on Friday the tax suspension was aimed at boosting palm oil prices and reducing high stockpiles, adding that he expected stocks to continue to increase in 2018.
The suspension, which is open to all companies with crude palm oil export licenses, will be scrapped before the end of the three-month period if crude palm oil stocks fall to 1.6 million tonnes.
"(The scheme) is one of the short-term pre-emptive measures by the government to manage the fall in crude palm oil prices, so that the smallholders' (small-scale farmers) incomes are not impacted and the country's oil palm industry continues to be competitive," Mah said.
Palm oil inventories in Malaysia, the second-biggest producer after Indonesia, had already risen to near two-year highs by the end of November, squeezing benchmark prices to a 16-month low in mid-December.
Official data showed stocks grew 16 percent in November, from October, to 2.56 million tonnes due to weak exports. Inventories are seen rising further to 2.69 million tonnes at the end of December - the highest in over two years - according to a Reuters poll.
The price of palm oil tumbled nearly 20 percent in 2017, and was up 0.35 percent at 2,594 ringgit ($649.31) at the close of trade on Friday.
The trader, however, cautioned that the impact of the tax suspension could be muted by gains in the ringgit, which advanced to 3.9950 per U.S. dollar on Friday, breaking the psychologically significant 4 level.
A stronger ringgit, palm oil's traded currency, usually makes the vegetable oil more expensive for foreign buyers.
"The recent strengthening of the ringgit may negate some of the effects, as well as the narrowing gap between palm and soyoil," he said, adding that Malaysia's upcoming general elections could be one reason for the export tax suspension.
"The overall trend is that stocks are high, and we haven't seen production declining at a higher magnitude yet. But the announcement is very timely, especially with the window for elections in the coming months."
Malaysian Prime Minister Najib Razak is seeking to win a third term in an election that must be held by August.
($1 = 3.9950 ringgit) - Reuters