05/03/2010 (Bloomberg) - Palm oil futures in Malaysia was set for the biggest weekly gain in nine on speculation that supplies may decline from Indonesia and Malaysia, the top producers.

Shipments of palm oil from Indonesia fell 15 percent to 1.2 million tons in January, from 1.42 million tons a month earlier, as output and demand fell, the Indonesian Palm Oil Association said on March 3.

May-delivery palm oil gained as much as 1 percent to 2,700 ringgit ($802) a metric ton on the Malaysia Derivatives Exchange before trading at 2,694 ringgit at 11:32 a.m. in Kuala Lumpur. The most-active contract has gained 3.8 percent this week, the most in nine weeks.

“The market has gained strength as most people are talking about a decline in production and subsequently a drawdown in stockpiles,” Jessie Fan, a futures trader at TA Futures Sdn, said by phone from Kuala Lumpur. “There’s been a bit of short- covering as well along the way.”

Stockpiles in Malaysia dropped 11 percent in January to 2 million tons from December, when they reached the second highest on record, as exports recovered, according to the nation’s palm oil board. Inventories may have dropped further to 1.7 million tons to 1.8 million tons last month, Fan said.

“Declining inventory will support prices,” and futures may reach 2,726 ringgit, a level last seen Jan. 6, she said.