Saudi Arabia and Russia have agreed to an extension which will see oil production capped until March 2018.
Two of the world’s largest oil producers, Russia and Saudi Arabia have agreed to extend cuts on oil production for a further 9 months, capping output until March 2018. The decision has been made in an attempt to curb global oversupply and support prices.
This surprise announcement which was confirmed by Saudi energy minister Khalid al-Falih and his Russian counterpart Alexander Novak comes ahead of the next OPEC meeting which has been scheduled for the 25th of May. It is expected that this confirmation will help to ensure other OPEC members and producers to take similar action.
Saudi Arabia, the leaders of OPEC (the Organization of the Petroleum Exporting Countries) and Russia control a fifth of the world’s oil supply and have taken measures to support the market as prices have stagnated at around $50/b.
Although both nations were expected to extend their current deals, the wording and timing of the statement surprised traders and prices jumped by over 1.5%.
Both ministers claim they will “do whatever it takes” to lower global inventories to their 5-year average and are optimistic that fellow producers will extend output cuts beyond their current deal.
In a briefing in Beijing, Falih said: "There has been a marked reduction to the inventories, but we're not where we want to be in reaching the five-year average. We've come to conclusion that the agreement needs to be extended."
The current agreement began on the 1st of January 2017 which saw producers pledge to cut output by 1.8m barrels per day (bpd) during the first half of the year. If this rate of production continues then the market could be forced into a small deficit by the fourth quarter of the year according to Edward Bell, director for commodity research at Emirates NBD in Dubai.
However, the effects of these output cuts could be offset by low-cost U.S. shale producers. The United States did not take part in the initial agreement and output in the country has increased following a rebound in prices from record lows in January 2016.