Oil prices jumped over three percent on Monday after Saudi Arabia and Russia agreed to extend output cuts.
The world’s two largest producers said they will continue to pump less through until March next year – an additional nine months on their original deal.
Since the start of the year there has been an agreement in place by 24 members of OPEC and non-OPEC countries to reduce output until June. That is designed to address the glut in supplies that has been pulling down prices.
Whatever it takes
Saudi energy minister Khalid al-Falih told reporters: “We’ve come to the conclusion that the agreement needs to be extended, we will not reach the desired inventory level by end of June.”
The Russian energy minister Alexander Novak added: “We believe that the extension at least until the first of April next year, is reasonable in order to continue our joint efforts to stabilise the market.”
Both ministers said they have agreed “to do whatever it takes” to further cut the huge amount of oil in storage around the world. They also expressed optimism that other producers will follow their lead. OPEC’s next official meeting is on May 25.
The problem is US shale oil producers who are not part of the agreement and who could keep pumping at high levels.
US drilling activity last week rose to its highest in two years, while US production has jumped more than 10 percent since its mid-2016 trough.
Shock and awe
“I think OPEC and Russia recognise that in order to get the market back on their side they will need ‘shock and awe’ tactics where they need to go above and beyond a simple extension of the deal,” said Virendra Chauhan, Singapore-based analyst at Energy Aspects.
“The market will also be looking at export cuts and not just production cuts, which is what is required to rebalance the market.”
Sceptical about Russia
Oil traders were surprised by the strong wording of the announcement, although it remained to be seen whether all countries participating in the deal would agree with the Saudi-Russian stance.
“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 Carsten Fritsch, an analyst at Commerzbank.
“That said, we are sceptical about Russia’s willingness to actively participate in any extended cuts.”