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Crude oil futures extend gains amid tight supply outlook

Crude oil futures extended gains into mid-morning trade in Asia Oct. 25 amid continuing expectations of supply tightening due to crude production being outstripped by recovering global demand.

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At 10:28 am Singapore time (0228 GMT), the ICE December Brent futures contract was up 64 cents/b (0.75%) from the previous close at $86.17/b, while the NYMEX December light sweet crude contract was 84 cents/b (1%) higher at $84.60/b.

Oil prices remain supported by expectations of supply tightness as the OPEC+ alliance sticks to its conservative approach in opening the taps for oil production amid fragile demand recovery.

"The upward momentum in oil prices also finds a continuation above $85 underpinned by comments from Saudi Arabia that suggest OPEC+ should maintain its cautiousness in managing supplies," IG Market Strategist Yeap Jun Rong said in a note Oct. 25.

Market participants are now gearing up for the next OPEC+ meeting scheduled for Nov. 4, where the alliance is expected to review production decisions for December.

The supply tightness is being further exacerbated by the inability of some OPEC+ countries to raise production quickly to match monthly increments in quotas.

"Even with higher quotas under their supply agreement, OPEC is struggling to raise output," analysts ANZ research analysts said in a note Oct. 25, adding that September production volumes were reportedly 15% lower than planned.

Crude prices are expected to maintain their strength as vaccine-led global demand recovery and seasonal winter demand in the Northern Hemisphere erode crude inventories, keeping the market well supported.

"Stockpiles continue to drain at the key storage hub of Cushing, which has seen nearby spreads in WTI surge to a three-year high," the ANZ research analysts noted.

However, risks related to demand recovery abound, with concerns that COVID-19 flare-ups could spark renewed lockdown measures that dampen recovery prospects, such as Russia's announcement of a week-long lockdown from Oct. 30 to Nov. 7.

"The focus in the region may now fall on the resurgence of COVID-19 infections in 11 provinces in China," Yeap said.

"With China's zero COVID-19 policy and evidence from past instances, one may expect aggressive measures to control virus spreads, thereby potentially putting risk appetite in the region on hold over the coming days until greater clarity is presented in that aspect," he added.