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Crude oil futures hit fresh multi-year highs amid tightening supply outlook

Crude oil futures continued their upward climb during mid-morning trade in Asia Oct. 18, hitting fresh multi-year highs as the supply and demand outlook remained supportive for prices and investors weighed the possibility of a return of Iranian oil.

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At 10:52 am Singapore time (0235 GMT), the ICE December Brent futures contract was up 94 cents/b (1.1%) from the previous close at $85.87/b, a high not seen since October 2018. The NYMEX November light sweet crude contract rose $1.33/b (1.61%) at $83.60/b. It was last higher on October 2014.

"[Last week was] the eighth consecutive week that crude oil has registered weekly gains, signaling strong bullish momentum behind this rally," analysts at OCBC Treasury Research said in a note.

"Easing restrictions around the world are likely to help the recovery in fuel consumption. The jet fuel market was buoyed by news that the US will open its borders to vaccinated foreign travelers next month," analysts at ANZ Research said.

Investors were now eyeing Iranian talks that are set to resume this week, about four months after negotiations were delayed as a new ultra conservative administration took office.

Analysts said the likelihood of a return of Iranian oil to global export markets was unclear.

"The timeline for more crucial diplomacy with the US remains unclear, but we still put the odds of an eventual deal just above 50-50," Paul Sheldon, Platts Analytics chief geopolitical adviser, said Oct. 15. "However, we acknowledge that Iran may no longer seek a deal under any realistic conditions."

US Special Envoy for Iran Robert Malley warned of that possibility Oct. 13, saying: "We have to prepare for a world ... where Iran doesn't have constraints on its nuclear program and we have to consider options for dealing with that, even as we hope that we can get back to the deal."

Platts Analytics expects Iranian oil supply to rise to 3.66 million b/d by December 2022 if a deal is reached and US oil sanctions are removed. If talks are delayed further or collapse, the Iranian supply outlook would fall to 2.17 million b/d.

Investors have piled long positions in the ICE Brent and NYMEX light sweet crude contracts in recent weeks, amid the improving sentiment for crude oil. Speculative net longs in ICE Brent crude as of Oct. 5 stood at 332,677 lots, most recent data from ICE showed, a high not seen since March 16.

Speculative net longs in the NYMEX light sweet crude contract meanwhile, stood at 326,605 lots as of Oct 12, a high not seen since July 31, according to data from the US Commodity Futures Trading Commission.

With oil prices hovering at such lofty heights, market watchers have said this will likely prompt a sharp return in production, particularly in the US, threatening the medium-term outlook for oil.

TotalEnergies CEO Patrick Pouyanne said late last week that US shale industry may prove unable to resist ramping up activity to produce more crude oil.

"They have been disciplined. But, at $85, I suspect they will forget," Pouyanne said. "That's why we have cycles."

The US oil rig count has climbed almost continuously since hitting a pandemic low of 172 on Aug. 14, 2020, data from oil services firm Baker Hughes showed. The latest US oil rig count stood at 445 as of Oct. 15, up 12 on the week. US crude oil output meanwhile, stood at 11.4 million b/d as of Oct. 8, US Energy Information Administration data showed.