Russia, Saudi Arabia back extension of oil output cuts

Robyn Ryan
May 17, 2017

Oil futures jumped Monday after the Saudi and Russian energy minsters threw their support behind extending output cuts by another nine months, but USA producers who can make profits even with oil at low prices could undermine the deal.

Kuwait's oil minister, Essam al-Marzouq, backed the previous day's agreement by Saudi Arabia and Russian Federation on the need to extend a crude output cut by Opec and other producing countries of 1.8-million barrels per day (bpd) until the end of March next year. Libya's crude oil production is at the highest level since October 2014, according to Bloomberg estimates. USA output has risen more than 10% since the middle of a year ago, and data released on Friday by oil services firm Baker Hughes showed that the number of active rigs across the country rose for the 17th week in a row.

It has been suggested that U.S. output, which is not included in the deal, might scupper the agreement, however, the current weak oil price makes exploitation of United States shale oil deposits marginal, so the USA also has a vested interest in seeing the oil price rise from a producer's perspective, but this is tempered as the United States is the largest market for oil.

Oil futures jumped as the ministers spoke. West Texas Intermediate added as much as 1.8 per cent to US$48.70 per barrel on the New York Mercantile Exchange, the highest since 2 May. Get our markets daily newsletter.

Putin, speaking in Beijing, said extending the output cuts was the right thing to do. "That is the most important condition for stability", he said at a separate press conference in Beijing.

OPEC members agreed in November to cut 1.2 million barrels a day of oil production.

OPEC is set to convene on May 25 in a meeting where its members and Russian Federation are expected to roll over an agreement to cut production.

However, another rise in US drilling activity weighed on markets. US crude inventories are finally showing some signs of shrinking, falling for the past five weeks from record levels at the end of March. "The Azerbaijani delegation will discuss this issue in Vienna on May 25".

Read Gadfly's take on what OPEC needs to do to reach its target. Novak declined to identify the nations.

While traders and analysts doubt producers sticking to a prolonged cutback, the strong wording of the announcement had an impact on the market. Hopefully, if oil manages to retain this rise for more than a month, it would be beneficial to the crude oil producing countries to sell it at higher price till then.

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