Oil rallies as Saudis, Russia vow do ‘whatever it takes’ to stabilize market
Brent oil futures jumped two per cent to a more-than-three-week high on Monday, topping US$52 a barrel after Saudi Arabia and Russia 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.
That is longer than the optional six-month extension specified in the deal, and shows that the battle to reduce overall supply has been more difficult than originally anticipated, in part because of rising U.S. production.
The ministers said they hoped other producers would join the cut, which would initially be on the same volume terms as before.
“The two ministers agreed to do whatever it takes to achieve the desired goal of stabilizing the market,” according to a joint statement released after the ministers’ meeting.
Global benchmark Brent crude settled up 98 cents, or 1.9 per cent, at US$51.82 a barrel, having touched US$52.63, the highest since April 21. U.S. crude ended US$1.01 firmer at US$48.85 a barrel, a 2.1 per cent gain.
Oil traders were surprised by the strong wording of the announcement, though it remained to be seen whether all countries participating in the deal would agree with the Saudi-Russian stance when they meet to decide policy on May 25 in Vienna.
And there’s also some concern that higher prices will compel U.S. shale producers to ramp up production, eventually resulting in lower prices.
“That’s the real worry,” said John Stephenson, president and CEO of Stephenson & Company, in an interview with BNN. “This is [Russia and Saudi Arabia’s] version of Shock and Awe.
“You’ve tried to wring these [shale] producers out of the market and bankrupt them, and you’ve had some success but very, very modest success.”
The Organization of the Petroleum Exporting Countries, Russia and other producers originally agreed to cut output by 1.8 million barrels per day in the first half of 2017, with a possible six-month extension, in a bid to shore up prices.
Oil has gained support from the deal but inventories remain high and rising output from other producers, including the United States, is keeping prices below the $60 that top exporter Saudi Arabia would like.
Some analysts said that U.S. production could still threaten to disrupt the market balance unless the cuts were deepened.
"We are of the camp that the extension cuts might not be enough - they might need to extend the cuts and to increase them to stabilize this market," said Oliver Sloup, director of managed futures at iitrader.com.
U.S. production is currently forecast to average about 9.31 million bpd this year - a level reached already, according to government figures. Sloup says it could surpass that if buoyed by higher prices.
Some analysts doubted that the producers would stick to a prolonged curb.
"Extending the cuts until March 2018 would take account of the fact that demand in the first quarter of a year is lowest for seasonal reasons," said Commerzbank analyst Carsten Fritsch.
"We are skeptical about Russia's willingness to actively participate in any extended cuts."
--With files from BNN