Oil prices rise after Saudi-Russo output deal

Crude oil prices jumped more than 2% on Monday after Saudi Arabia and Russia agreed to keep production cuts in place into 2018.

The energy ministers of both countries – the world's two leading oil producers – said that current output curbs should be extended until March 2018.

Beijing briefing

At a briefing in Beijing, Khalid al-Falih and Alexander Novak said in a joint statement: "There has been a marked reduction to the inventories, but we're not where we want to be in reaching the five-year average."

The two ministers continued: "We've come to the conclusion that the agreement needs to be extended."

Saudi Arabia, the de facto leader of oil cartel Opec would like to see oil prices closer to $60 a barrel, but high inventories and rising output from US shale oil producers have kept prices in a range below this level for much of the last year.

Opec Headquarters: The oil cartel meets with other producers this month to talk of extending output cuts - source: Wikimedia Commons

Falling prices

More recently, bearish US inventory data and reports that other Opec members were failing to comply with existing output cuts, drove crude prices below $50, with Nymex West Texas Intermediate falling to a two-month low of $47.66 last week.

Ole Hansen, head of commodity strategy at Saxo Bank, said: "It is still too early to call an end to the latest sell off but with a heavy build-up in speculative selling during the past few weeks further gains could become self-feeding as sold positions are covered."

Opec meeting

A continuation of the output cuts could be sealed at an Opec meeting on 25 May. While Russia is not an Opec member, as a participant in the original cuts, its representative will be present at the meeting.

On Monday, Nymex WTI climbed 3% to $49.27 a barrel, while Brent crude gained 2.6% to $52.16.

Oil stocks rally

The news also drove shares in oil producing companies higher. On London's FTSE 100, BP gained 1.6% to 467.2p, while Royal Dutch Shell added 1.3% to £22.21. France's Total rose 1.3% to €48.59 and Spain's Repsol added 1.1% to €14.81.

Biraj Borkhataria, energy sector analyst at Royal Bank of Canada, was positive on the oil sector: "We think the majors can hold the fort over the next few years at lower oil prices."

"That said, should a 'lower forever' scenario play out, we believe dividends would need to be rebased, and progressive payout policies would need to be rethought."