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Saudis, Russia say oil supply cut being extended to next March

Oil prices jump close to 2% after world’s two biggest producers extend production cut

Russia and Saudi Arabia between them produce about 20 million barrels a day of crude, equivalent to one-fifth of global consumption. Photograph: Sergei Karpukhin/Reuters

Oil rallied after Saudi Arabia and Russia stoked expectations that production cuts might be extended for nine months.

While output curbs introduced at the start of the year are working, global inventories aren’t yet at the level targeted by Opec and its allies, Saudi energy minister Khalid Al-Falih said Monday in Beijing alongside his Russian counterpart, Alexander Novak. The ministers agreed the deal should be extended through the first quarter of 2018 at the same volume of reductions, they said.

“When Saudi Arabia and Russia come out together it sends a very strong signal to the market,” Mike Wittner, head of commodities research at Société Générale SA in New York, said. “With these two countries behind the extension of the accord, chances are very high that they will get all of Opec behind it.”

The largest of the 24 producers that agreed to cut supply for six months are reaffirming their commitment to the deal amid growing doubts about its effectiveness so far. An increase in Libyan output, together with a surge in US production and signs of recovery in Nigeria, may undercut Opec’s strategy to re-balance the market and boost prices.

West Texas Intermediate for June delivery climbed $1.01, or 2.1 per cent, to $48.85 a barrel on the New York Mercantile Exchange. It was the highest close since April 28th. Total volume traded was about 38 per cent of the 100-day average.

Brent for July settlement rose 98 US cents, or 1.9 per cent, to $51.82 a barrel on the London-based ICE Futures Europe exchange. It was also the highest close since April 28th. The global benchmark crude ended the session at a $2.66 premium to July WTI.

Extending the cuts at already agreed-upon volumes is needed to reach the goal of trimming global stockpiles to the five-year average, the energy ministers of the world’s biggest oil producers said in a joint press conference. They will present their view at a Vienna summit of OPEC and other exporters on May 25th.

“Preliminary consultations show that everybody is committed” to the output agreement, said Mr Novak. “I don’t see reasons for any country to quit.”

Opec members agreed in November to cut output by 1.2 million barrels a day. Several non-members, including Russia, reached an accord in December to contribute a combined 600,000 barrels a day of reductions.

Not everyone is on board yet. Kazakhstan, the biggest producer in the former Soviet Union after Russia, isn’t ready to join an extended accord automatically, its energy minister Kanat Bozumbayev said Monday, according to Interfax.

“It’s a powerful signal when Saudi Arabia and Russia come out together,” Tamar Essner, a New York-based energy analyst at Nasdaq, said. “They are the most important countries taking part and without their agreement you would not be able to get other countries to come onboard.” – Bloomberg