Oil prices rise on expectation of extended crude supply cut

Employees of a foreign exchange trading company work near monitors showing French President-elect Macron on TV news and the Japanese yen's exchange rate against the euro and Japan's Nikkei average in Tokyo

Employees of a foreign exchange trading company work near monitors showing French President-elect Macron on TV news and the Japanese yen's exchange rate against the euro and Japan's Nikkei average in Tokyo

Prices jumped 2.1 percent Monday after energy ministers from Saudi Arabia and Russian Federation said they favor prolonging crude-output cuts by global producers through the first quarter of 2018.

At the end of November, the Organization of Petroleum Exporting Countries (OPEC) agreed to cut output by 1.2 million barrels per day (mb/d) from January 1, initially for a period of six months.

The Saudi-Russia announcement on Monday will probably extend a price rebound that began last week, though the rally is "modest" compared to the increase when OPEC cuts were first agreed to late a year ago, Goldman Sachs analysts said in a report.

Longer cuts at already agreed-upon volumes are needed to reduce global inventories to the five-year average, the energy ministers of the world's biggest crude producers said at a joint press briefing in Beijing yesterday.

The decision for extending the oil production cut was mutually agreed upon by the two major oil producing countries and all the active members of the OPEC.

"No (compensations) are linked particularly to the deal", he said, adding that the Ministry continues working with companies and the Finance Ministry on other issues, including excess-profits tax and watered fields subsidies.

But there's one thing standing in the way of higher prices: US oil production.

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The supply cut has helped prices recover from a low of $26 a barrel early past year.

"The market is certainly reacting to comments from Saudi Arabia and Russia's ministers, and it should help at least maintain current prices", Will Yun, a commodities analyst at Hyundai Futures Corp., said by phone.

In December 2016, OPEC and non-OPEC producers reached their first deal since 2001 to curtail oil output jointly and ease a global glut after more than two years of low prices.

OPEC members agreed in November to cut 1.2 million barrels a day of oil production, and several non-members, including Russian Federation, agreed in December to contribute a combined 600,000 barrels a day of output reductions.

United States oil output witnessed a steep growth in the last one year by almost 10% since mid-last year and touched 9.3 million bpd production.

Oil futures were up in North American trading on Tuesday, with prices headed closer to daily highs reached in the prior session, as investors looked ahead to weekly data from the USA on stockpiles of crude and refined products. The original goal of the OPEC-led cuts was to raise prices to around $60, but the reality is that $55 Brent may be the best that the cartel and its customers can do.

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