Published: Fri, May 19, 2017
Markets | By Noel Gibbs

Oil Futures Bullish On Continued Production Cuts

Oil Futures Bullish On Continued Production Cuts

Oil's gains on Monday came after Saudi energy minister Khalid al-Falih and his Russian counterpart Alexander Novak said they had agreed to prolong an existing production cut deal by another nine months until March 2018. The global Brent oil benchmark was up 3% to $52.33 per barrel this morning, and the U.S. West Texas Intermediate price was up more than 3% to $49.36.

Initially, it had been planned that the deal to cut nearly 1.8 million barrels per day in production and agreed on December 10, will be effective in the first half of this year with possibility of rollover toll the end of 2017.

Major oil producers are preparing to extend output cuts until March 2018 in a bid to reduce a global supply glut.

Oil has gained support from the deal but inventories remain high and rising output from other producers, including the United States, is keeping prices below the $60 that top exporter Saudi Arabia would like.

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Kuwaiti oil minister Essam al-Marzouq lent his weight Tuesday to a growing consensus over the need to extend the OPEC/non-OPEC output cut deal into next year.

"Year-to-date compliance with production cuts remained robust at 96 percent", said the report.

Amid the cutbacks, production in the US, which isn't part of the agreement, has risen to the highest level since August 2015.

Russian Federation 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.

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On the demand side, The IEA reiterated its forecast rate of growth at 1.3 million bpd for this year, to a total 97.9 million barrels, although over the first half of the year demand will grow more slowly because of India, the U.S., Germany, and Turkey.

"With the USA rig count increasing for its 17th consecutive week, I think we can safely say that the crude oil battle is well and truly on", said Mr Matt Stanley, a fuel broker at Freight Investor Services in Dubai.

"That said, we are sceptical about Russia's willingness to actively participate in any extended cuts". Crude stockpiles in the 35-nation Organization for Economic Co-operation and Development reached a new all-time high in March, largely due to robust US imports and maintenance at Northern Hemisphere refineries that dampened crude demand, IEA reported on Tuesday.

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