24/4/07  (Bloomberg) -- Palm oil futures in Malaysia, the world's largest producer of the commodity, gained on speculation that stockpiles will drop on rising demand from China and Europe.

Higher crude oil prices also boosts the appeal of palm oil as an alternative fuel. Crude oil traded near a three-week high in New York after surging above $65 a barrel yesterday on concern conflict in Nigeria may disrupt supplies.

``Rising crude oil prices improves the feasibility of biofuel,'' Alvin Tai, an analyst at OSK Research Sdn., said by phone in Kuala Lumpur today. Crude oil and palm oil prices ``have been quite closely correlated.''

Palm oil for July delivery, the most active contract, rose as much as 21 ringgit, or 1 percent, to 2,190 ringgit ($640) a metric ton on the Malaysia Derivatives Exchange. It was at 2,175 ringgit, or 0.3 percent higher, at the end of the morning session.

Crude oil for June was at $65.75 a barrel, down 14 cents, in after-hours electronic trading on the New York Mercantile Exchange at 11:30 a.m. Mumbai local time. The contract rose $1.78, or 2.8 percent, to $65.89 a barrel yesterday, the highest close for a front-month contract since April 2.

Palm oil stockpiles in Malaysia will likely fall further to 1.3 million tons by end of this month on rising demand from China and Europe, according to southern Indian city Hyderabad-based TransGraph Consulting Pvt., which advises traders.

Stockpiles of the vegetable oil in Malaysia dropped to 1.34 million tons, lowest since August 2005, in March, the Malaysian Palm Oil Board said on April 10.

Palm oil prices reached the highest in more than eight years on April 16 after Malaysia reported a surge in exports in the first two weeks of the month. Malaysian Palm Oil Board data on April 10 showed March inventory plunged to a 19-month low.

Indonesia and Malaysia, the world's biggest producers of palm oil, account for about 85 percent of production worldwide. China and India are the biggest importers.

Palm oil, typically used as cooking oil or in soaps, can be mixed with diesel to stretch fossil fuel supplies.