Russia, Saudi Arabia Back Extension Of Oil Output Cuts

Posted May 17, 2017

Oil jumped more than 2 percent to its highest in more than three weeks on Monday, topping $52 a barrel after Saudi Arabia and Russian Federation said that supply cuts need to last into 2018, a step towards extending an OPEC-led deal to support prices for longer than first agreed.Energy ministers from the world's two top producers said that supply cuts should be prolonged for nine months, until March 2018.

Russia's energy ministry said extending the cuts, which were came into force in November, through to 31 March 2018 would demonstrate "producers' determination to ensure stability, predictability and incremental development of the market". That would be longer than the optional six-month extension first agreed.

The global benchmark for crude oil was up $1.25, of 2.5 percent on the day, at $52.10 a barrel.

WTI Crude is now trading up 3.03 percent at $49.29 per barrel, with Brent Crude up 2.93 percent at $52.33 (1126GMT).

USA bank Goldman Sachs said the deal would likely extend the oil price rebound "although the rally so far. has remained modest compared to the move that occurred a year ago when the OPEC cuts were first announced".

"At this level, there isn't too big a correlation between oil and equities but since we've seen oil fall quite a bit in a month or so, today's rally in oil is helping the market grind higher", said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas. The Organization of Petroleum Exporting Countries, which produces around a third of the world's oil, and a group of non-OPEC countries led by Russian Federation, had agreed in November to keep the cuts in place through June.

The Saudi-Russia announcement on Monday will probably extend a price rebound that began last week, though the rally is "modest" compared to the increase when OPEC cuts were first agreed to late previous year, Goldman Sachs analysts said in a report. In line with stronger recent performance from the United States shale sector we have revised upwards our expectation throughout 2017 and we now expect total USA crude production to exit the year 790,000 barrels a day higher than at the end of 2016, which is an upward revision of 100,000 barrels a day since last month's Report. Surging U.S. production has raised concern that the Organization of Petroleum Exporting Countries and its partners are failing to reduce an oversupply. Oil has surrendered about half its gains since the producers' accord to cut output late a year ago.

Oil and gas companies, which make up 13.6% of the index, benefitted from the rise in oil prices with Premier Oil up 3.8% to 61.25p while BP climbed 1.1% to 465p.

"Low oil prices may bring satisfaction for some consuming countries in the short run, but in the long term as a result of reduced investment in new oil production, they could end up paying a much higher price for a barrel of oil", he said.

Saudi Arabia's Energy Minister Khalid al-Falih (L) and Russia's Energy Minister Alexander Novak attend a joint briefing in Beijing, China May 15, 2017.

Recent US gasoline demand, a closely-watched metric, is down by nearly one-quarter of a million barrels per day from a year ago.

In this series, we'll focus on some bullish and bearish drivers of oil prices.

Analysts including Goldman Sachs have said the global oil market is re-balancing, and the International Energy Agency predicts demand will significantly exceed production if OPEC and its partners extend their cuts into the second half of the year.