A new agreement between Saudi Arabia and Russia – the world’s two top oil producers – to extend oil output cuts for a further nine months until March 2018 to rein in a global crude glut has sparked a bull-ish response to oil stocks and crude oil prices.
After closing at a record high last week, the FTSE 100 climbed further in early trade today to reach 7,460.2 points before slipping back to 7,444.99 by midday.
Big Oil shares provided most of the support: BP rose 1.5% while Dutch Shell was up 1.3%. Crude oil prices rose more than 2% to around $50-barrel.
And yet, uncertainty continues to hover over oil markets and investors about the long term impact on crude oil prices; every time the price of oil goes up, it makes existing shale wells more profitable – and encourages investment in production in new and/or mothballed shale wells which.
But one major unknown will be the response of low-cost U.S. shale producers, which could undermine the unified effort to prop up the market.
The United States did not participate in the original agreement to cut supplies and producers there have ramped up output this year, buoyed by the recovery in prices from multi-year lows hit in January 2016.
In turn, this decreases the market share of the major crude oil producers (excluding the USA) and acts as a weight on oil prices, etc.
Saudi Arabia the de facto leader of OPEC, and Russia, the world’s biggest producer, together control a fifth of global supplies, but have been spurred into action as crude futures LCOc1CLc1 have languished around $50 per barrel.
Under the current agreement that started on 1 Jan 2017, OPEC and other producers including Russia pledged to cut output by almost 1.8 million barrels per day (bpd) during the first half of the year. While it was broadly expected that OPEC and Russia would agree to extend the cut, the timing and wording of the statement sent crude prices up more than 1.5 per cent in early trading.
Chris Beauchamp, chief market analyst at IG, commented: “This has helped oil prices to move higher once more, but the <OPEC> cartel appears to get diminishing returns each time it announces a reduction in output. They will need to go big on the cuts theme at their May meeting in Vienna to avoid a sense of disappointment creeping in.”
Meanwhile, Aberdeen-based oil and gas minnow Ithaca Energy – which has been taken over by Delek, the giant Israeli energy group – has further cut its N. Sea operating costs to $21-barrel in the first quarter of this year.