(Bloomberg) -- Oil rallied after Saudi Arabia and Russia stoked expectations that production cuts might be extended for nine months.
Futures closed at their highest in more than two weeks. While output curbs that started Jan. 1 are working, global inventories aren’t yet at the level targeted by OPEC and its allies, Saudi Energy Minister Khalid Al-Falih said Monday in Beijing alongside his Russian counterpart, Alexander Novak. The ministers agreed the deal should be extended through the first quarter of 2018 at the same volume of reductions, they said.
"When Saudi Arabia and Russia come out together it sends a very strong signal to the market," Mike Wittner, head of commodities research at Societe Generale SA in New York, said by telephone. "With these two countries behind the extension of the accord, chances are very high that they will get all of OPEC behind it."
The largest of the 24 producers that agreed to cut supply for six months are reaffirming their commitment to the deal amid growing doubts about its effectiveness so far. An increase in Libyan output, together with a surge in U.S. production and signs of recovery in Nigeria, may undercut OPEC’s strategy to re-balance the market and boost prices.
West Texas Intermediate for June delivery climbed $1.01, or 2.1 percent, to $48.85 a barrel on the New York Mercantile Exchange. It was the highest close since April 28. Total volume traded was about 38 percent of the 100-day average.
Brent for July settlement rose 98 cents, or 1.9 percent, to $51.82 a barrel on the London-based ICE Futures Europe exchange. It was also the highest close since April 28. The global benchmark crude ended the session at a $2.66 premium to July WTI.
Money managers have cut their bets on rising WTI and Brent prices back to where they were before OPEC agreed to pare output.
That will "set the stage for the rally," Tamar Essner, a New York-based energy analyst at Nasdaq Inc., said by telephone. "Nobody wants to be short going into the OPEC meeting."
Extending the cuts at already agreed-upon volumes is needed to reach the goal of trimming global stockpiles to the five-year average, the energy ministers of the world’s biggest oil producers said in a joint press conference. They will present their view at a Vienna summit of OPEC and other exporters on May 25.
“Preliminary consultations show that everybody is committed” to the output agreement, said Novak. “I don’t see reasons for any country to quit.”
OPEC members agreed in November to cut output by 1.2 million barrels a day. Several non-members, including Russia, reached an accord in December to contribute a combined 600,000 barrels a day of reductions.
Not everyone is on board yet. Kazakhstan, the biggest producer in the former Soviet Union after Russia, isn’t ready to join an extended accord automatically, its Energy Minister Kanat Bozumbayev said Monday, according to Interfax. The Central Asian nation will discuss its level of participation at the Vienna gatherings on May 24 and 25, the news service reported, citing the minister.
"It’s a powerful signal when Saudi Arabia and Russia come out together," Essner said. "They are the most important countries taking part and without their agreement you would not be able to get other countries to come onboard."
While OPEC and allies are cutting production, U.S. output has risen to the highest level since August 2015 and is poised to climb further as explorers stage the longest shale drilling ramp-up since 2011.
"This is bullish because they are going to extend the cuts longer than was expected," Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.4 billion, said by phone. "It’s also bullish for oil producers here. They will keep investing, drilling and building pipelines in the U.S."
- Libya is ratcheting up oil output with less than two weeks to go before the OPEC meeting.
- Crude output at major U.S. shale plays is projected to rise to around 5.4 million barrels a day in June, highest since May 2015, according to EIA’s monthly Drilling Productivity Report
- Brazil oil giant Petroleo Brasileiro SA is taking advantage of a drop in borrowing costs to sell dollar-denominated bonds.