Russia, Saudi Arabia back extension of oil output cuts

People watch a South Korean TV news broacast showing file footage of a North Korean missile launch at a railway station in Seoul

People watch a South Korean TV news broacast showing file footage of a North Korean missile launch at a railway station in Seoul

Saudi Arabia and Russian Federation in unison said Monday that they agreed that the oil output cut agreement needed to be extended by nine months until March 2018 to achieve the desired balancing effect on oil markets, sending prices higher by nearly 2% in less than an hour.

The price for Brent crude oil was up 3.25 percent about a half hour before the start of trading in NY to $52.52 per barrel. For the strategy to work, however, we believe that (1) compliance needs to remain high and (2) long-term oil prices need to remain low to prevent shale producers from ramping up investment significantly more.

"With the USA rig count increasing for its 17th consecutive week, I think we can safely say that the crude oil battle is well and truly on", said Matt Stanley, a fuel broker at Freight Investor Services (FIS) in Dubai. "The ministers also expressed optimism that a wider circle of countries outside the current group will see the benefit of this cooperation in bringing stability to oil markets, and will join the effort", it added.

The ministers agreed that the deal should be extended another nine months into the first quarter of 2018 at the same volume of reductions.

OPEC began production cuts on January 1 in a bid to reduce swollen global inventories and bolster the price of oil, which is still stuck at half its 2014 level.

Thanks to a relentless rise in drilling activity, mostly from shale producers, USA oil output has shot up by more than 10 percent since mid-2016 to over 9.3 million bpd.

The importance of Saudi Arabia and Russian Federation for the overall crude oil market bolstered expectations that there would be a full agreement from members already restricting output to extend cuts at next week's key policy meeting.

"Falih said the next round of cuts will be on the same terms as the first curbs deal, to cut nearly 1.8m barrels a day", says the Financial Times.

But, this would depend on how much low-priced USA shale producers would raise production.

An OPEC source familiar with the market situation told Reuters earlier on Monday that oil inventories in floating storage have declined by one-third since the start of the year.

Its US counterpart West Texas Intermediate fell below $45 at the end of last week and after a similar rally, was down 0.1 per cent at $46.19 a barrel this afternoon.

Since then Opec ministers have issued a flurry of supportive statements to assure the market that a deal is likely to come from the May 25 meeting.

Goldman Sachs' Damien Courvalin, Jeffrey Currie, Henry Tarr, Callum Bruce, Chris Mischaikow and Huan Wei think that a Russia-Saudi agreement bodes well for agreement from the rest of OPEC's members.

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