Saudi Arabia and Russia, the world’s two top oil producers, said on Monday they favor extending oil output cuts for a further nine months until March 2018 to hold back a global crude glut, pushing up prices.
The timing of the announcement ahead of OPEC’s next official meeting on May 25 and the statement’s strong wording surprised markets, and the move is expected to go a long way to ensure that other OPEC members and producers who participated in the initial round of cuts fall into line.
In a joint statement that followed an earlier meeting, Saudi energy minister Khalid al-Falih and his Russian counterpart Alexander Novak said they had agreed to prolong an existing deal until March next year.
They will present their position ahead of a meeting between OPEC and other nations that are part of the agreement later this month in Vienna.
Extending the curbs at already agreed-upon volumes is needed to reach the goal of reducing global inventories to the 5-year average, the energy ministers added, pledging “to do whatever it takes” to reach that average.
“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 told a briefing in Beijing alongside Novak.
“Therefore we came to the conclusion that ending will probably be better by the end of first quarter 2018.”
The ministers will consult with other oil-producing countries with “the goal of reaching full consensus on the 9-month extension” they are seeking, according to the statement.
Saudi, the de facto leader of OPEC, and Russia, the world’s biggest producer, together control a fifth of global supplies, but have been spurred into action as crude futures LCOc1CLc1 have languished around $50 per barrel.
Under the current agreement that started on Jan. 1, the Organization of the Petroleum Exporting Countries (OPEC), and other producers including Russia pledged to cut output by almost 1.8 million barrels per day (bpd) during the first half of the year.
OPEC and Russia Extending the cut was broadly anticipated, yet the timing and wording of the statement sent crude prices up more than 1.5 percent in Asian trading.
“I think 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,” 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.”