Global Oil Prices Jump on Talk of Extending Production Cuts -- Update

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.

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.

U.S. crude futures were recently up $1.35, or 2.8%, at $49.19 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, rose $1.36, or 2.7%, to $52.20 a barrel on ICE Futures Europe.

"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."

The move higher continues a three-day streak of gains for crude prices, which have rebounded after creeping doubts about OPEC's ability to eliminate a glut of crude that has weighed on the market sparked a sharp selloff earlier this month.

Market participants have grown increasingly confident in recent weeks that OPEC will continue throttling back production through the end of the year. But some remain skeptical that extending the cuts -- even into the first months of next year -- will bring supply and demand back into balance.

"If people actually bought into that, we'd be up $2 or $3, not $1.50," said David Leben, director of commodity derivatives at BNP Paribas.

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.

And other producers, including U.S. shale drillers, have pounced on the higher prices following OPEC's initial cuts. 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.

Gasoline futures rose 3.65 cents, or 2.3%, to $1.6126 a gallon. Diesel futures rose 3.08 cents, or 2.1%, to $1.5241 a gallon.

--James Marson, Summer Said and Benoit Faucon contributed to this article.

Write to Neanda Salvaterra at neanda.salvaterra@wsj.com, Alison Sider at alison.sider@wsj.com and Jenny W. Hsu at jenny.hsu@wsj.com

Oil prices jumped to a three-week high after Russian and Saudi Arabian energy ministers said they would back a nine-month extension to an agreement aimed at bringing down global inventories and lifting prices.

U.S. crude futures rose $1.01, or 2.11%, to $48.85 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, rose 98 cents, or 1.93%, to $51.82 a barrel on ICE Futures Europe.

Monday's move capped a four-day streak of gains for oil prices, lifting both benchmarks to their highest levels since late April.

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, including Russia, to cut output by some 1.8 million barrels a day should be extended to the end of March 2018.

Analysts and investors have largely come to expect the cuts OPEC and other major producers agreed to in November will be extended through the end of the year.

But the announcement that Saudi Arabia and Russia both support continuing to cut output in the first quarter came as more of a surprise and jolted U.S. crude-oil futures to $49.66 in earlier trading. Investors that had turned bearish in recent weeks rushed to cover short positions.

The cooperation between the world's two largest oil producers means that $50 a barrel is likely a floor for prices, said Shawn Reynolds, portfolio manager of VanEck Global Hard Assets Fund.

"Whenever prices get down into the [$]40s, you're going to see these guys do something," Mr. Reynolds said. "I really think it's really unprecedented cooperation" between Russia and Saudi Arabia.

Oil prices have sold off sharply at times this year -- most recently earlier in May -- as investors have become doubtful OPEC is making progress toward its goal of working off a glut of crude that has weighed on the market.

Experts forecast the global glut may be eliminated by the end of 2017 if the cuts are extended.

Extending the cuts another three months likely means inventories will continue shrinking into next year, said Ebele Kemery, head of energy investing at JPMorgan Asset Management.

"We will draw in the first quarter if the cuts are extended through to next year," she said. "There's no doubt in my mind."

Still, some market participants remain concerned OPEC's moves to restrict supply could haunt the market next year. Producers, including U.S. shale drillers, have pounced on the higher prices following OPEC's initial cuts. More oil is coming online from Canada, Brazil, Russia, Kazakhstan and the U.S., notes Commerzbank.

"Any expansion of production would entail the risk of another oversupply, " said Commerzbank analysts in a recent note.

U.S. 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.

Gasoline futures rose 1.93 cents, or 1.22%, to $1.5954 a gallon. Diesel futures rose 1.63 cents, or 1.09%, to $1.5096 a gallon.

--Jenny W. Hsu, James Marson, Summer Said and Benoit Faucon contributed to this article.

Write to Alison Sider at alison.sider@wsj.com and Neanda Salvaterra at neanda.salvaterra@wsj.com

(END) Dow Jones Newswires

May 15, 2017 16:55 ET (20:55 GMT)