Russia, Saudi Arabia back extension of oil output cuts

In order to rein in a glut, Saudi Arabia and Russian Federation said on Monday that they agreed to the need for a 1.8 million barrels per day (bpd) crude supply cut to be extended for nine months, until the end of March 2018.

"Extending the cuts for another nine months may not eliminate the glut in the market", said Sadad Al-Husseini, a former executive vice president of exploration and development at Saudi Arabian Oil Co., the state producer also known as Saudi Aramco.

That is longer than the optional six-month extension specified in the deal, and shows that the battle to reduce overall supply has been more hard than originally anticipated, in part because of rising us production. Global benchmark Brent crude added 1.7 percent to $51.69 on the ICE Futures Europe exchange.

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.

The Energy Ministers of Saudi Arabia and Russian Federation said that they had "reached an understanding" that it is necessary to keep surplus crude off the market "until March 31, 2018", in order to stabilize a world oil market that is still oversupplied.

"Our nations agreed to extend the deal up to the end of March 2018 with the same volume of allocations, which was included in the agreement from December 10", he said.

The Organization of the Petroleum Exporting Countries, Russia and other producers originally agreed to cut output by 1.8 million barrels per day in the first half of 2017, with a possible six-month extension.

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Some analysts doubted that the producers would stick to a prolonged curb.

According to Naeem Aslam, the chief analyst at United Kingdom online broker Think Markets, despite the optimism that sent oil prices higher yesterday, traders will eventually shift their focus back to the output deal's actual effect on the supply glut.

The feature in the marketplace early this week is a continuation of the recent rally in the crude oil market.

US shale's favorite financial trick is getting less attractive.

Following the Russia-Saudi statement, Kazakh Energy Minister Kanat Bozumbayev said "Kazakhstan should follow the trend", in comments reported by Russia's RIA Novosti agency. "We have, before coming to this announcement today, reached out to many of our colleagues within and outside OPEC, and I think there is general consensus that this is the right approach".

News of the deal six months ago had provided an immediate boost to prices, but the strategy contained the seeds of the plan's own downfall, because higher prices encouraged producers in the US, which isn't party to the deal, to raise their output and invest in new production. This is required to stabilize the oil market.

Goldman retained its average Brent price forecast for the third quarter of 2017 at US$57 per barrel.

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