Oil prices up 2% after deal to extend supply cut

Marlene Weaver
May 16, 2017

US crude rose 1.96 percent to $48.78 per barrel and Brent was last at $51.76, up 1.81 percent on the day.

"The two ministers agreed to do whatever it takes to achieve the desired goal of stabilising the market and reducing commercial oil inventories to their five-year average level".

After the energy ministers of Saudi Arabia and Russian Federation talked up the potential for the Organization of Petroleum Exporting Countries and other nations to extend output cuts into early 2018, the crude market took off. OPEC's preferred market structure returned, with nearer contracts at a premium further along the curve, with Brent and West Texas Intermediate crude rising above their key 200-day moving averages in intraday trading. Oil has surrendered most of its gains since their deal late past year.

Goldman's Jeff Currie says talk that OPEC could start defending its market share again to squeeze USA producers is the wrong way to look at the situation: "Shale and OPEC are taking on the worldwide oil [producers] that are sitting at the top [of the cost curve]".

Mr Falih added: "We've come to the conclusion that the agreement needs to be extended".

Prices of other commodities, including copper and aluminium, tracked the moves in oil, National Australia Bank Currency Strategist Rodrigo Catril said in note, adding that this "helped commodity-linked currencies outperform".

The Organization of the Petroleum Exporting Countries meets in Vienna on May 25 to consider the extension.

Brent for July settlement arose $1.30, or 2.6 percent, to $52.15 a barrel on the London-based ICE Futures Europe exchange.

By May 9, hedge funds were running a net short position of 21 million barrels in USA gasoline and 9 million barrels in heating oil.

Factory output growth rose 6.5 percent in April from a year ago, while fixed-asset investment grew 8.9 percent in the first four months of the year, both missing analyst expectations.

The Organization of the Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the de-facto leader, and other producers led by Russian Federation, pledged late previous year to cut output by nearly 1.8 million barrels per day (bpd) during the first half of 2017.

"Preliminary consultations show that everybody is committed" to the output agreement, said Novak.

The ministers agreed the deal should be extended through the first quarter of 2018 at the same volume of reductions, they said. "I don't see reasons for any country to quit".

Rising output in the U.S., CMC Markets chief analyst Michael McCarthy said, will reinforce investor doubt about OPEC's strength.

Meanwhile, two OPEC members that were exempt from reducing output because of internal strife are boosting supplies. Euro rose against the dollar on Monday after a weak US manufacturing report compounded a bounce in commodities prices that drove the greenback lower. It's unclear whether the countries would still be exempted if the deal is prolonged.

Some analysts said that USA production could still threaten to disrupt the market balance unless the cuts were deepened.

Other reports by Insurance News

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