Oil continued its see-saw start to the new year, registering its biggest advance in six weeks on Thursday after Opec’s biggest producer said that it had slashed output to the lowest level in almost two years.
Brent, the global oil market, rose as much as $1.24 to $56.43 a barrel after Saudi Arabia’s energy minister Khalid al-Falih said that the kingdom had cut production to less than 10m barrels a day for the first time since February 2015.
Prices were also supported by the US dollar, which fell in the wake of Wednesday’s press conference by president-elect Donald Trump. A weaker US currency makes oil cheaper for holders of other currencies.
Addressing the Atlantic Council Global Energy Forum in Abu Dhabi, Mr Falih said that Saudi Arabia had cut production by more than it had promised under a global pact to curb output by 1.8m barrels a day.
Opec members and other oil producing countries were spurred into action by a savage two-and-half-year downturn in oil prices which pressed budgets and upended spending plans.
Under the deal, agreed late last year, Saudi Arabia pledged to lower production by about 500,000 b/d to just above 10m b/d, the largest contribution by an Opec member to its collective 1.2m b/d of cuts.
When asked about its compliance with deal, Mr Falih said that the kingdom had already exceeded its target and was now pumping just below 10m b/d. Output at that level implies a reduction of more than 625,000 b/d from the level the country produced in October, the agreed baseline for the cuts.
Since the deal was announced, oil prices have risen by more than 15 per cent but they have been unable to hold above $55 a barrel for any period of time. Already this year, Brent has traded as high as $58 and as low as $53.
Many investors are sceptical that the agreed cuts will be fully delivered and are also worried about a recovery in output from the US shale industry.
Earlier this week, the US Energy Information Administration forecast that oil output from the US would increase 1.3 per cent to 9m barrels per day in 2017, abandoning an earlier prediction of a 0.9 per cent fall.
Meanwhile, hedge funds and speculators have started to pare positions, as they wait for more evidence that Opec supply cuts will be substantial enough to balance the market. By cutting below 10m b/d, something first flagged as a possibility by Mr Falih in December, Saudi Arabia is trying to address those concerns.
“I believe the agreement between Opec and non-Opec will hold,” Mr Falih said on Thursday, rejecting speculation that compliance with the deal would be weak. The six-month pact would be reviewed in the middle of the year and may be renewed, he added.
That decision will hinge on prices and if there has been a reduction in global oil inventories, according to analysts.
Mr Falih said that he did not have a price target but said that three-digit prices had fuelled too much investment in unsustainable resources, while the lower prices of a year ago were also unsustainable.
“We in Saudi and the GCC (Gulf Cooperation Council) want moderation,” he said. “We want prices supportive of production and, equally important, consumption in key markets.”