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Oil Price Jumps as Saudi Arabia and Russia Extend Supply Cuts
Oil prices have surged by over 2.0% on Monday following an announcement from Saudi Arabia and Russia that the cut on the production of crude oil will be extended for a further nine months, until March 2018.
The price of Brent crude hit a high of $52.58 a barrel today following a meeting in China between the two countries’ energy ministers. This was a price level last seen in early May, when oil prices hit a five-month high, but had faltered since over worries that producers may be unwilling to limit production.
Saudi Energy Minister Khalid al-Falih and his Russian counterpart Alexander Novak made a joint-statement on Monday in Beijing, emphasizing their mutual goal of stabilizing the market and reducing commercial oil inventories.
The Organization of the Petroleum Exporting Countries (OPEC) led by Saudi Arabia and other producers led by Russia, had late last year committed to cut oil output by almost 1.8 million barrels per day for the first half of 2017. Under the deal, OPEC members agreed to cut 1.2 million bpd.
This new extension will be on the same volume limiting terms as before, although the ministers had expressed their hope in other producers joining them.
Saudi Arabia and Russia Aiming for Higher Oil Prices
Saudi Arabia and Russia together produce about 20 million bpd of crude oil – about 1/5 of global consumption. They carry enough political and economic influence in global oil markets to ensure that other producers who had previously participated in the cuts will also carry along.
Saudi Arabia and Russia are seen as working together to push oil prices higher, and this joint statement comes at an opportune time for them to reach their objective. An OPEC meeting is scheduled to be held in Vienna on May 25, to further underscore these efforts.
Higher output from the U.S., which is not part of these agreements, has however undermined the efforts by OPEC and Russia. Last week, U.S. drilling activity had reached its highest level since April, 2015. U.S. production is currently at 9.3 million bpd – an increase of 10% since last year.
Interest in Brent contracts and WTI crude futures hit an all-time record this month of over 2.5 million contracts open for front-month Brent, and over 2.3 million contracts open in front-month WTI.