Oil Surges On OPEC Extension News, But Will The Deal Work?

Crude prices hit a three-week high above $52 a barrel today, after top producers Saudi Arabia and Russian Federation agreed to extend output cuts for a further nine months, until March 2018, opening the possibility of extending an OPEC-led deal to support prices further than expected.

While output curbs that started January 1 are working, global inventories aren't yet at the level targeted by OPEC and its allies, Saudi Energy Minister Khalid Al-Falih said in Beijing alongside his Russian counterpart, Alexander Novak.

Saudi Arabia's Energy Minister Khalid al-Falih (L) and Russia's Energy Minister Alexander Novak attend a joint briefing in Beijing, China May 15, 2017.

Analysts are expecting Opec to extend the agreement for another six months when the cartel meets later this month, and there appears to be a consensus emerging among nations involved in the original pact to extend the agreement beyond June, according to Saudi Arabia's Opec governor, Adeeb Al-Aama.

Saudi, the de facto leader of OPEC, and Russian Federation, 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. US output has risen more than 10% since the middle of past year, and data released on Friday by oil services firm Baker Hughes showed that the number of active rigs across the country rose for the 17th week in a row.

However, Libya have increased output and North America have also surged in production, which is likely to undercut OPEC's strategy to re-balance the market and prop up prices.

The global benchmark for crude oil was up $1.25, of 2.5 percent on the day, at $52.10 a barrel.

However, Naeem Aslam, chief market analyst at Think Markets UK, warned traders were getting carried away with unjustified optimism, highlighting the current production cut has not been able to produce any substantial results so far.

The U.S. rig count rose by 9 to 712, extending an 11-month drilling recovery to the highest level since August 2015, implying that further gains in domestic production are ahead.

But there's one thing standing in the way of higher prices: USA oil production.

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Oil has gained support from the supply deal but inventories remain high and output from other producers such as the United States is rising, keeping prices below the $60 that Saudi Arabia would like to see.

An OPEC source familiar with the market situation told Reuters earlier on Monday that oil inventories in floating storage have declined by one-third since the start of the year.

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