Oil prices have surged to a 17-month high after a group of the world’s largest producers, including Saudi Arabia and Russia, agreed to reduce output in a landmark deal.
The weekend agreement between Opec and a number of non-Opec members, notably Russia, has pushed Brent crude up more than 4% to $56.64 a barrel, its highest level since mid-July 2015. West Texas Intermediate, the US benchmark, is up 4.4% at $53.78.
The move follows an agreement last month by Opec to cut production by 1.2m barrels a day from 1 January next year, following weeks of wrangling.
On Saturday, producers from outside Opec agreed to reduce output by 558,000 barrels a day to help end the supply glut which has sent oil prices tumbling. Although less than the targeted 600,000 barrels it was the largest ever contribution to production cuts by non-Opec members.
It represents the first such deal between Opec and non-Opec members for 15 years.
Adding to the oil price momentum was a comment from Saudi Arabia suggesting it could make bigger cuts than first envisaged. The Saudi oil minister, Khalid al-Falih, said: “I can tell you with absolute certainty that effective 1 January, we’re going to cut and cut substantially to be below the level that we have committed to on 30 November.”
Meanwhile Iraq’s oil minister Jabar al-Luaibi told Reuters it was committed to complying with the pact, although it was confident it had the potential to raise output in the future. He said: “The cuts will aim at the figures we agreed with Opec definitely, but (for) the areas of the cuts there are many options on the table.”
Despite the prospect of US shale producers continuing to raise their own output levels, analysts believe the oil price has further to climb.
Fawad Razaqzada, market analyst at Forex.com, said: “Make no mistake about it – this historic agreement is a gamechanger. Although the crude oil rally has already started at the end of last month when the Opec first announced the deal, I think there is plenty of fuel left in this rally.
“Admittedly, after a big gap we may see a retracement of some sort in prices now but ultimately the fundamentals still point to higher levels going forward. The oil market will now be balanced earlier than would have been the case without a deal.
“It is very likely that US shale producers will take advantage of this opportunity to ramp up their crude output once again but this will be a worry for another day.
“On top of the now-favourable supply-side dynamics, the global economic recovery is continuing at a steady pace, especially in the US. So rising demand for oil from the US – and China – could be additional factors that could help fuel a much larger rally in oil prices than many had envisaged a few months ago.”
News of the proposed cuts has benefited the rouble, sending the Russian currency up more than 2% against the dollar to a 14-month high despite the prospect of a US interest rate rise on Wednesday. Bond yields are falling on the expectation that the dearer oil price will feed through to higher inflation.
Meanwhile commodity companies were among the biggest gainers on the stock market, with Royal Dutch B shares more than 3% higher and BP 2% better.
