After weeks of speculation, it’s official: Russia, Saudi Arabia, and Iraq have declared their support for an extension to the oil production cuts OPEC and its partners agreed last December to regulate global supply and prices.
Reuters reported Russia’s President Vladimir Putin had announced the latest update ahead of the OPEC meeting beginning today in Vienna, saying Russia had agreed with Saudi Arabia to extend the cuts by six to nine months. The cuts total 1.2 million bpd, of which OPEC is supposed to cut 800,000 bpd. However, with U.S. sanctions against Venezuela and Iran have reduced OPEC’s total supply by a lot less: energy data provider Kayrros said earlier this month the overhang was as much as 90 million barrels above the average for 2018.
The decision to extend the cuts is not particularly surprising. With relentlessly rising U.S. oil production, OPEC has few good moves left, if any. Russia has repeatedly noted it would be happy with lower oil prices than its Middle Eastern partners but even so it has once again agreed to continue cutting. Some saw in this a deal, in which the Middle Eastern partners—notably Saudi Arabia—would compensate Moscow for the inconvenience of having to sell less oil with investment contracts in energy and other sectors.
While oil prices jumpеd on the news it remains to be seen whether this jump will turn into a full-fledged rally of the sort Middle Eastern producers need to balance their budgets. Judging by their failure to do so despite the cuts until now, the chances of Brent hitting US$70 a barrel, let alone US$80, are slim, especially as worry about the growth of the global economy persists. The U.S.-China trade war remains the major driver of this worry and even a recent announcement the sides had agreed to restart their talks could not do much for oil prices or overall market sentiment.
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