Oil prices surged above $57 a barrel for the first time since July 2015 on Monday, rallying as much as 6.5 per cent after the Opec cartel clinched a long-sought supply pact with Russia and other big crude exporters.
Russia led a loose coalition oil producers from outside Opec, including Oman, Mexico and Kazakhstan, in an agreement signed this weekend to reduce supply by 558,000 barrels a day — with Moscow agreeing to shoulder just over half the cut.
Saudi Arabia, the most powerful member in Opec, said it may now cut supply further than it initially pledged when Opec’s 13 members agreed their own supply cut of more than 1m barrels a day on November 30.
The deals amount to the first global supply pact since 2001, with producers battling to reverse a two-year price crash that has cut deeply into their revenues, slashed industry spending worldwide, and left many oil-dependent economies mired in recession.
“Non-Opec participation should add to bullish sentiment . . . [and] continue to support the oil rally into 2017,” said Morgan Stanley analyst Adam Longson.
Brent, the international oil benchmark, jumped by more than $3 a barrel minutes after the open in Asia on Monday to hit a year-high of $57.89, with traders scrambling to buy back bets placed against the price, before paring gains slightly. It has risen more than 20 per cent since Opec’s initial deal less than two weeks ago.
International energy companies have been boosted by the crude rally, with share prices for BP and Royal Dutch Shell both up more than 10 per cent this month, while US shale-focused companies like Continental Resources and Anadarko Petroleum have risen more than 15 per cent.
Traders are likely to shift focus to the implementation of the deal, with concerns some of the supply cuts may not materialise or consist of generous interpretations, including natural decline rates at mature fields in some non-Opec countries.
But the backing for the deal from the Russian president, Vladimir Putin, and Saudi Arabia’s royal family should make traders take the deal seriously, analysts said, with the need for a higher oil price forcing the two countries to overcome animosity stoked over their support for opposing sides in Syria’s bloody civil war.
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“Some justifiable doubts will remain over the implementation of the production quotas which have been announced,” said analysts at JBC Energy in Vienna.
“But the ability of Saudi Arabia and Russia to come to an agreement in the current climate has to be seen as a significant statement of intent.”
The push to retake control of oil supply by Saudi Arabia has reversed its earlier decision to open the spigots to try to squeeze out other high-cost producers.
US shale, in particular, will be watched closely to see if a sustained recovery in price can reignite an industry that was always the most visible target of Opec’s market share battle, given its rapid growth between 2011 and 2015. That may prove the biggest threat to the price recovery.
While US oil production has fallen by about 10 per cent since prices crashed from an average of more than $100 a barrel in the preceding four years, suppliers have cut costs and refinanced. Last week US oil drillers added more rigs than at any time since July 2015, according to energy service company Baker Hughes.
Opec members Nigeria and Libya, whose production has been hit by violence, may also see higher output in the coming months.
“Opec have taken a very important step towards stopping the relentless build up in global [oil inventory] stock levels,” said David Hufton at oil brokerage PVM.
“As long as compliance is strong, Libya and Nigeria fail to rebound and US producers take time to respond.”
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