Saudi Arabia, Russia agree to push OPEC supply cut to March 2018

OPEC supply cut extension announcement boosts oil prices

Oil prices were up on Monday after the world’s two top oil producers, Saudi Arabia and Russia, agreed that the OPEC supply cut pact should be extended until March 2018 to tackle the global crude glut.

In a statement issued by Saudi Energy Minister Khalid al-Falih and his Russian counterpart, Alexander Novak, the two said the would do “whatever it takes” to reduce the oil oversupply.

“There has been a marked reduction to the inventories, but we’re not where we want to be in reaching the five-year average,” Falih said in Beijing alongside Novak.

“We’ve come to the conclusion that the agreement needs to be extended.”

Following the announcement, Brent prices were up $1.39 to $52.23/barrel by 14:07 GMT.

According to Reuters, by extending the deal a minimum of nine months, OPEC will likely face some pushback against the plan by some cartel members and non-members currently participating in the pact.

For instance, OPEC member Iraq has said it will back renewing the deal by only six months and non-OPEC member Kazakhstan is expecting its production to jump and may not be on board for the extended deal.

But, Oman said it was fully behind the nine-month extension of the OPEC supply cut deal which saw participating members cut oil production by about 1.8 million barrels per day (b/d) since the beginning of 2017.

OPEC is set to meet in Vienna on May 25 to discuss the pact which was originally agreed to last December and included most OPEC members and 11 non-cartel countries, including Russia.

The Reuters report said Russian President Vladimir Putin recently met with Russian oil firms who back the nine-month extension.

“I feel optimism because our main partner in this process, and our main partner without doubt is Saudi Arabia, has fully implemented all the agreements that took place up to now, and secondly, Saudi Arabia wants to maintain stable and fair prices for oil,” Putin said while on an official visit to Beijing.

Despite the current OPEC agreement, global crude supplies have remained overstocked, well above their five year average and are hovering near record highs partly due to increased US shale production.

One analyst told Reuters that production cuts alone will not rebalance the market, and participants will also need to reduce exports.

“OPEC and Russia recognize 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,” Virendra Chauhan, Singapore-based analyst at Energy Aspects told Reuters.

OPEC sources also told Reuters that cartel producers have not determined whether deeper cuts are required to balance the market.

Edward Bell, director of commodity research at Emirates NBD in Dubai said if producers continued to cut crude production at the current pace, the market could be pushed into a small deficit by the fourth quarter.