Oil futures rose sharply Monday after energy ministers from Russia and Saudi Arabia said they would back a nine-month extension to the production cut deal by the world's biggest oil producers to limit supply.
In a joint statement Monday, Saudi Energy Minister Khalid al-Falih and Russian Energy Minister Alexander Novak said a pact by the Organization of the Petroleum Exporting Countries and external producers such as Russia to cut output and bring down global oil inventories should be extended to the end of March 2018.
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The ministers expressed optimism that "a wider circle of countries will see the benefit of the stabilization of oil markets and will join the efforts."
The oil cartel is set to make a final decision about whether to extend the agreement at an OPEC meeting on May 25.
Brent crude, the global oil benchmark, rose 2.62% to $52.14 a barrel on London's ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading up 2.65% at $49.12 a barrel.
"It seems more or less a slam dunk that there is going to be a continuation of the cuts," said Bjarne Schieldrop, chief commodities analyst at SEB Markets. "The signals are pretty strong and clear from both OPEC and Russia. They are really removing a substantive amount of the uncertainty about the upcoming decision in May."
Late last year, OPEC and a handful of nonmember producers such as Russia agreed to reduce collective daily output by about 1.8 million barrels a day in the first half of 2017 in a bid to bring global inventories back to their five-year average.
The latest data showed that while participants have been compliant with quotas, stockpiles have remained elevated.
Crude stockpiles in the most industrialized nations increased from the fourth quarter of 2016 by 31 million barrels to just over 3 billion--276 million barrels above the five-year average, said OPEC last week.
Experts forecast that the global glut may be eliminated by the end of 2017 if the cuts are extended, but the supply action by major oil producers will come at a price that may haunt the market next year.
"Extending the cuts until March 2018 would take account of the fact that demand in the first quarter of a year is lowest for seasonal reasons, meaning that any expansion of production would entail the risk of another oversupply," said Commerzbank analysts in a recent note.
Even if the production cuts are extended at next week's meeting, more oil is coming online from Canada, Brazil, Russia Kazakhstan and the U.S., notes Commerzbank.
"The reality is OPEC is really stuck [between] a rock and a hard place because the U.S. shale producers have proven they can easily lower their production costs," said Vivek Dhar, a commodities strategist at Commonwealth Bank of Australia.
American drilling activity has risen for 17 weeks in a row, according to rig-count data from Baker Hughes. And last week, the U.S. government raised its domestic-production estimates for this year and next. Rising output in the U.S., CMC Markets chief analyst Michael McCarthy said, will reinforce investor doubt about OPEC's strength.
"OPEC no longer has the clout it once had," he said. Even if OPEC agrees to extend its production cuts next week, investors will doubt whether the group has the necessary pull to raise prices over time, Mr. McCarthy said.
U.S. producers still need to remove obstacles to exporting crude to new markets in Asia, said JBC analysts in a recent report.
"U.S. crude exports have taken off this year spurred by conducive WTI/Brent and WTI/Dubai crude spreads. The surge in exports is highlighting the need for more export capacity, particularly that for berthing larger vessels," said the analysts.
Still, energy analysts say the global oil demand outlook is positive.
India's total oil demand grew 125,000 barrels a day year on year in April, said JBC.
Nymex reformulated gasoline blendstock--the benchmark gasoline contract--rose 2.07% to $1.61 a gallon. ICE gasoil changed hands at $459.75 a metric ton, up $11.00 from the previous settlement.
James Marson, Summer Said and Benoit Faucon contributed to this article
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(END) Dow Jones Newswires
May 15, 2017 06:25 ET (10:25 GMT)