Russia, Saudi Arabia back extension of oil output cuts

Tammy Harvey
May 17, 2017

Oil jumped to its highest level in two weeks after the Saudi Arabian and Russian energy ministers said they are in favor of extending a production-cut deal for nine months.

Goldman sees long term oil prices at $45-$55 per barrel, but US producers have already said they plan to boost production at those prices.

Global benchmark Brent crude settled up 98 cents, or 1.9 percent, at $51.82 a barrel, having touched $52.63, the highest since April 21.

Oil halted gains near $48/bbl after USA rigs targeting crude rose a 17th week, countering a report that OPEC and other major producers reached an initial agreement to extend output cuts.

A second source said he expected Iran would probably agree to a nine-month extension when Opec and non-Opec producers meet to set policy on 25 May in Vienna, provided that other producers such as Iraq were also on board.

"It has taken some time for stocks to reflect lower supply when volumes produced before output cuts by OPEC and eleven non-OPEC countries took effect are still being absorbed by the market", the report said. There's a "good chance" that Russian Federation, a non-Opec nation, will extend its cooperation with the organisation because Saudi Arabia wants price stability and is complying with its obligations in the deal, he said.

Initially, it had been planned that the deal to cut nearly 1.8 million barrels per day in production and agreed on December 10, will be effective in the first half of this year with possibility of rollover toll the end of 2017. But the move to prolong the deal until March of next year surprised market analysts...

Azerbaijan has fulfilled its obligation to cut daily oil output by 35,000 barrels. How anxious they are about the rise of USA shale's increase, now at 9.3 million barrels per day (BPD), and it's very detrimental effect on their national finances. Since November, when cuts were announced, American production has jumped more than 600,000 barrels per day, and it's showing no signs of slowing down. Their regimes have been forced to adapt to today's market environment, but that transition has been an exceedingly painful one, coming after years of $100+ per barrel oil.

The feature in the marketplace early this week is a continuation of the recent rally in the crude oil market.

However, another rise in US drilling activity weighed on markets. "Get prepared for real sacrifices or we will have to say goodbye to the deal", he said.

"Growth was weaker than expected in the first quarter, however, with notable downward revisions seen in the United States - where demand is essentially flat - and in Germany, Turkey and India", the report said.

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