Oil producers began to dream of a durable lift in crude prices after Saudi Arabia signalled it would cut output further to balance global markets by early next year, and revealed a production-cutting agreement with Russia. The news drove some crude futures for 2017 delivery to $57 a barrel, the highest level in 18 months.
“I can tell you with absolute certainty that effective January 1 we’re going to cut [production] and cut substantially,” Saudi Oil Minister Khalid Al-Falih said on the weekend.
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“Al-Falih and his Russian counterpart Alexander Novak also revealed Saturday that they have been working for nearly a year on the agreement” for both countries to cut their crude output, Bloomberg reports, “meeting multiple times in secret.”
Benchmark Brent crude oil futures hit $57.89 on the Saudi statement, a price last seen in July 2015.
U.S. oil futures have gained almost 20% since the Organization of Petroleum Exporting Countries agreed November 30 to cut output for the first time in eight years.
“The non-OPEC cut was expected but nobody foresaw the Saudi statement,” futures trader Bob Yawger of Mizuho Securities USA told Bloomberg. “The market’s giving bonus points because the Saudis are willing to do whatever has to be done to balance the market. We wouldn’t be up anywhere near as much on the agreement [with Russia] alone.”
In fact, earlier efforts by the oil-producing cartel to engineer a global cut in crude production fell apart when Russia first agreed to join a rollback, then rescinded that commitment.
“The main impact of the non-OPEC collaboration is to pull the global market into balance, if not in deficit, in the second quarter of 2017, rather than in the third quarter,” ESAI Energy Managing Director Sarah Emerson forecast. “On an annual average basis, this pushed the global balance into a 200,000- to 300,000-barrel-a-day deficit for the year.”
The news boosted the stock prices of oil and gas companies, with Exxon Mobil and Chevron among the biggest winners.
