Saudi Arabia Agrees to Further OPEC Crude Oil Production Cuts

The Wall Street Journal reported that Saudi Arabia has told OPEC officials that it wants to extend the cartel’s agreement to cut crude-oil production for another six months when the group meets next month, according to people familiar with the matter. Saudi support is essential for the 13-member Organisation of the Petroleum Exporting Countries to renew its agreement and the country has been largely responsible for the group nearly meeting its reduction targets during the first three months of the deal.

Light, sweet crude for May settled up US32c, or 0.6 per cent, at $US53.40 a barrel on the New York Mercantile Exchange. Brent crude, the global benchmark, gained US25c, or 0.4 per cent, to $US56.23 a barrel on ICE Futures Europe. Both hit their highest settlements since March 1.

Prices jolted higher shortly after the news in the early afternoon although they had been in negative territory nearly all morning. Those gains, though small, extend oil’s longest winning streak since August, now to six sessions. US oil has lost ground only once in the past 11 sessions. The earlier fall had largely been just from traders taking profits after the long string of gains, traders and analysts had said. The sheer length of the rally was making it more difficult for traders to keep buying, as many will eventually just want to lock in a profit or avoid a rush of other traders doing so. "That is exactly the type of news that would extend that rally,” said John Saucer, vice-president of research and analysis at Mobius Risk Group in Houston.

Saudi Arabia is OPEC’s biggest producer and the world’s top exporter of oil. It has shouldered the cartel’s largest burden, slashing as much as 700,000 barrels a day in some months to make up for shortfalls from other members. The kingdom’s Energy Minister, Khalid al-Falih, has been unwilling to publicly signal that he would support extending the cuts, but he has since decided he would sign off on renewing the agreement, the people familiar with the matter said.

Whether OPEC extends its agreement has become one of the major focal points of the market. If OPEC doesn’t agree to an extension, it may face an onslaught of bearish traders and new oversupply that sinks prices back to near $US40 a barrel, Citigroup analysts said on Tuesday. Extending the deal was likely to push prices to $US60 a barrel, they added.

"As we have been saying, the rebalancing of the market is under way, while OPEC and non-members are likely to fully abide to the production quotas,” Peter Cardillo, chief market economist at First Standard Financial in New York, said in a note. "In fact, we think the chance of renewing them in June is a near certainty.”

Traders are also awaiting reports coming today on US inventories from industry and government organisations. These reports have taken on even more importance than usual in recent weeks as traders gauge whether OPEC’s cuts will cause historically high storage levels to fall in the world’s biggest market.

Many believe that will happen, but are taking a wait-and-see attitude for now, said Bart Melek, head of commodity strategy at TD Securities in Toronto. Unexpected and large stockpile additions in early March had caused a tumble in oil prices before the recent rebound.

"After the rally we had, it’s not surprising people would want to take some profits off the table here,” Mr Melek said.