(Bloomberg) -- Saudi Arabia and Russia said they favor prolonging oil-output cuts by global producers through the end of the first quarter of 2018, setting a firmer timeframe for a likely extension of the curbs into next year. Crude prices jumped.
Extending the curbs at already agreed-upon volumes is needed to reach the goal of reducing global inventories to the 5-year average, the energy ministers of the world’s biggest oil producers said in a joint press conference in Beijing. They will present their position ahead of a meeting between OPEC and other nations that are part of the agreement later this month in Vienna.
Russia and Saudi Arabia, the largest of the 24 nations that agreed to a deal to cut production for six months starting in January, are reaffirming their commitment to the deal amid growing doubts about its effectiveness. Surging U.S. production has raised concern that the Organization of Petroleum Exporting Countries and its partners are failing to reduce an oversupply. Oil has surrendered most of its gains since their deal late last year.
“The agreement needs to be extended as we will not reach the desired inventory level by end of June,” Saudi Arabia’s Khalid Al-Falih said during the event with Russia’s Alexander Novak. “Therefore we came to the conclusion that ending will probably be better by the end of first quarter 2018.”
Oil futures jumped as the ministers spoke. U.S. West Texas Intermediate added as much as 1.8 percent to $48.70 a barrel on the New York Mercantile Exchange, the highest since May 2. Global benchmark Brent crude added 1.7 percent to $51.69 on the ICE Futures Europe exchange. Both are still more than 50 percent below their peaks in 2014.
As OPEC and its allies curb supply, production in the U.S., which is not part of the agreement, has risen to the highest level since August 2015 as drillers pump more from shale fields. But American crude inventories are showing some signs of shrinking, falling for the past five weeks from record levels at the end of March.
OPEC members agreed in November to cut 1.2 million barrels a day of oil production, and several non-members, including Russia, agreed in December to contribute a combined 600,000 barrels a day of output reductions.
“Preliminary consultations show that everybody is committed” to the output agreement and no country is willing to quit, said Novak. “I don’t see reasons for any country to quit.” The energy ministry has held preliminary discussions with Russian companies on the matter, he said.
More countries have been invited to the meeting of OPEC and its partners to be held May 24-25, according to Novak. While the curbs by the producers is working, “we are not where we want to be” on the initial goal of bringing global inventories down “gently” below the 5-year average, Al-Falih said.
“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 and the right thing to do,” he said of the proposal to extend the curbs for 9 months.
Analysts including Goldman Sachs Group Inc. have said the global oil market is re-balancing, and the International Energy Agency predicts demand will significantly exceed production if OPEC and its partners extend their cuts into the second half of the year.
Meanwhile, two OPEC members that were exempt from reducing output because of internal strife are boosting supplies. Libya’s crude production has risen to more than 800,000 barrels a day as fields restart, the most since 2014. Nigeria’s 200,000 barrel-a-day Forcados oil pipeline is ready to export again after being shut down almost continuously since February 2016. It’s unclear whether the countries would still be exempted if the deal is prolonged.
“Our joint interest is to bring stability, reduce volatility and serve the interests of producers and consumers for the long term,” Al-Falih said on Monday.
With assistance from Elena Mazneva, Sarah Chen