LONDON - Nickel prices extended gains on Tuesday, boosted by dwindling inventories and short covering by speculators, but expectations of rising supply from Indonesia curbed the upside.

Three-month nickel on the London Metal Exchange gained 0.1% to $23,865 a tonne in official open-outcry trading after earlier climbing as much as 1% and following a 1.6% rise in the previous session when it touched a three-week peak.

Nickel prices had slumped 28% over about seven weeks, weighed down by concern about weak demand and rising output in Indonesia, before rebounding last week.

"Nickel got overdone on the downside, but I would argue that $23,000 or $24,000 is an equilibrium, fair value for the nickel market," said independent consultant Robin Bhar.

"Demand will be strong, no doubt about it, but there's a lot of supply coming from Indonesia, so I think we'll have a market either in balance or moving into surplus this year."

The short speculative position on the LME reached 20% of open interest by Friday's close, the largest since July 2022, but shorts have recently been closing out some positions, broker Marex said in a report.

Nickel prices jumped on Friday after data showed that nickel inventories in warehouses linked to the Shanghai Futures Exchange slid 28% during the week to the lowest since July last year.

On the LME, the discount of the nickel cash contract over three month futures has tumbled to $179 a tonne from $333 over the past three sessions, indicating concern about short-term supply.

LME three month copper slipped 0.2% in official activity to $8,947 a tonne, hobbled by uncertainty over the impact of the banking crisis and how quickly demand would recover in top metals consumer China, Bhar said.

Downstream copper demand in China dropped slightly last week due to "overseas macro factors" and rising prices, Huatai Futures analysts said in a note.

LME aluminium dipped 0.2% to $2,360 a tonne and zinc shed 0.2% to $2,905, while lead added 0.3% to $2,140 and tin advanced 1.7% to $25,850.

(Reporting by Eric Onstad; Additional reporting by Enrico Dela Cruz in Manila, editing by Ed Osmond and Louise Heavens)