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Saudi-Russian agreement confirms OPEC cut extension

OPEC's late-2016 decision to boost oil prices by coordinating with other nations by reducing oil out seemed to work initially. Much of their efforts were stymied, however, by a surge in oil output from U.S. companies as well as lagging cooperation among other non-OPEC nations, particularly Russia. A rally in the price of crude oil, spurred on by the initial OPEC decision, came to a halt by early May.

Now, oil-producing nations may have the tide turned back in their favor. Reuters reported May 15 that Saudi Arabia and Russia had reached another agreement to extend the production cut effort an additional nine months. This marked a key decision between Saudi Arabia and OPEC, which account for the bulk of the world's oil exports, as well as non-OPEC member Russia, which is a primary exporter throughout Asia.

The deal was also highly symbolic, proving that the world's biggest oil powers were still willing to take drastic measures to maintain a firm grip on global oil supplies in the face of stiff competition. Indeed, Saudi energy minister Khalid al-Falih was quoted as saying he and Russia were determined "to do whatever it takes" to reduce global oil inventories.

Markets react

Market prices of crude oil jumped significantly after news of the deal reached commodities trading desks around the world. West Texas Intermediate crude was already listed 3.5 percent higher in the hours before trading began in New York May 15, just shy of $50 per barrel. Brent crude had already rebounded to $52.46 per barrel, according to Bloomberg.

The combined effects of a surge in U.S. oil output while OPEC worked to cut its own inventories has been generally middling oil prices in the first half of 2017. Analysts said that if current trends continued through the rest of the year, it could finally bring supply in line with demand and therefore bring better profit margins to beleaguered producers. 

But U.S. oil drillers, and shale oil extraction firms in particular have become a persistent thorn in the side of OPEC and Russia, as they have continued to increase output through ruthless cost-cutting. Reuters noted that U.S. active rig counts reached their highest level in two years the week of May 8, while total production output had risen more than 10 percent over its recent low-point around one year ago. This has allowed domestic producers to not only better supply U.S. refineries and end users, but has also opened the door for greater international oil trading. U.S. oil exports to China and other parts of Asia rose significantly in the first quarter of 2017, posing a serious threat to OPEC and Russian dominance in that region.

The OPEC-Russia agreement is not official yet, and must be finalized during the next formal OPEC meeting May 25.

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