Desperate Saudis, Russians Agree to Extend Oil Production Cuts

The world’s top petrostates are seeing light at the end of a long oil glut tunnel, but the rough times aren’t over yet. On Monday, Saudi Arabia and Russia agreed to extend a cut on oil production through March of next year in the cartel’s latest bid to come to grips with three years of excess oil sloshing around the market.

Saudi Arabia and Russia, two of the world’s top oil producers, agreed to the supply cut extension on Monday ahead of an Organization of Petroleum Exporting Countries (OPEC) meeting on May 25. OPEC and 11 other top producing countries agreed to cut production by 1.8 million barrels per day last November, cuts that should have helped bring oil supplies and oil demand back into balance.

But industry experts speculated OPEC would have to extend the cuts since markets haven’t yet bounced back.

Saudi Energy Minister Khalid Al-Falih and Russian Energy Minister Alexander Novak pledged “to do whatever it takes to achieve…market stability, predictability and sustainable development,” according to a statement released the two released Monday.

The nine-month extension also shows the world’s leading petrostates haven’t yet found the magic recipe to confront the U.S. shale revolution, which has helped keep oil prices low despite OPEC’s best efforts to rein in supply and nudge crude prices higher.

“We have, before coming to this announcement today, reached out to many of our colleagues within and outside OPEC, and I think there is general consensus that this is the right approach,” Al-Falih said at a joint press conference with his Russian counterpart in Beijing Monday.

The market liked the sound of that, sending U.S. domestic benchmark West Texas Intermediate and international Brent crude prices up more than 3 percent in trading Monday morning.

OPEC has been trying to strangle, or at least contain, the U.S. oil boom for the last three years. By flooding the market from late 2014 on, the cartel hoped to drive oil prices so low that shale wells would be uneconomic. The strategy wasn’t a total failure — some U.S. projects were shuttered, and producers took a raincheck on drilling new wells while prices were low — but overall the U.S. oil boom has proven a lot more resilient than the Saudis, or anyone else, expected.

Even as oil prices languished last year, U.S. oil production only fell by about 800,000 barrels a day — but then quickly bounced back this year to more than 9 million barrels a day, even though crude prices are about the same. And the U.S. oil and gas rig count — another indicator of a country’s total production — rose again in May to nearly double it what was a year ago.

Thanks to production and efficiency breakthroughs, shale can easily stay competitive even with oil as low as $45 a barrel, energy analysts say, which means OPEC might need to find a Plan C.

“I think OPEC and Russia recognize that in order to get the market back on their side they will need ‘shock and awe’ tactics where they need to go above and beyond a simple extension of the deal,” Virendra Chauhan, an analyst at Energy Aspects, told Reuters.

There are limits to how much OPEC can dial back production to shore up prices, though. Riyadh has already dialed back its output by 500,000 barrels per day, more than any other OPEC member. Iran, which just shook off years of sanctions on its oil exports, is still trying to regain market share, not surrender its piece of the global petroleum pie. And to top it off, OPEC’s trims have been somewhat counteracted by production increases in countries like Nigeria, and Libya, where conflict had kneecapped oil output recently.

Desperate as it is, OPEC might want to be careful how much shock and awe it opts for. The International Energy Agency has warned that global oil discoveries reached a historic low last year, as cheap crude hit oil companies’ exploration budgets and appetites. If new wells aren’t regularly drilled to replace declining production in older fields, the world could well see a shortfall in oil before long.

“The IEA has repeatedly warned that an extended period of sharply lower oil investment could lead to a tightening in supplies,” the IEA wrote in April. “It brings an additional cause of concern for global energy security at a time of heightened geopolitical risks,” the IEA warned.

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