Oil prices spiked after Saudi Arabia and Russia said they favour prolonging agreed Opec and non-Opec output cuts into the first quarter of next year.
Global benchmark Brent increased by as much as 3.3 per cent to US$52.52 a barrel on ICE Futures Europe and West Texas Intermediate climbed by up to 3.4 per cent, to $49.45 a barrel on the New York Mercantile Exchange. Both remain more than 50 per cent below their 2014 peak.
Longer cuts at already agreed-upon volumes are needed to reduce global inventories to the five-year average, the energy ministers of the world’s biggest crude producers said at a joint press briefing in Beijing yesterday. They will present their position to other countries ahead of a meeting between Opec and other producing nations later this month in Vienna.
“The agreement needs to be extended as we will not reach the desired inventory level by end of June,” said Khalid Al Falih, Saudi Arabia’s energy minister, said during the event with his Russian counterpart, Alexander Novak. “Therefore, we came to the conclusion that ending [the deal] will probably be better by the end of first quarter 2018.”
Vladimir Putin, Russia’s president, said later yesterday: “It’s right that the decision was made not for two, three, four months but for nine months.”
“That is the most important condition for stability,” he said at a separate press conference in Beijing. There’s a “good chance” that Russia, 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.
Russia and Saudi Arabia, the largest of the 24 producers that agreed to cut output for six months starting in January, are reaffirming their commitment to the deal amid growing doubts about its effectiveness. Surging US production has raised concern that Opec and its partners are failing to reduce an oversupply. Oil has surrendered about half its gains since their accord late last year.
Opec members agreed in November to cut 1.2 million barrels per day (bpd) of oil production. Several non-members, including Russia, agreed in December to contribute almost 600,000 bpd of output reductions combined.
Amid the cutbacks, production in the US, which isn’t part of the agreement, has risen to the highest level since August 2015. But American crude inventories are finally showing some signs of shrinking, falling for the past five weeks from record levels at the end of March.
While the curbs by producers are working, “we are not where we want to be” in bringing global inventories down “gently” below the five-year average, Mr Al Falih said. “We have, before coming to this announcement [yesterday], reached out to many of our colleagues within and outside Opec and I think there is general consensus that this is the right approach.”
Russia’s Mr Novak said that “preliminary consultations show that everybody is committed” to the output agreement and no nation is willing to quit.
According to Naeem Aslam, the chief analyst at UK online broker Think Markets, despite the optimism that sent oil prices higher yesterday, traders will eventually shift their focus back to the output deal’s actual effect on the supply glut.
“The real heat will be on during the second half of the year. To keep up with the agreed level of production it will take much more than just bringing forward maintenance at oil production fields. Get prepared for real sacrifices or we will have to say goodbye to the deal,” he said.
* with bloomberg
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