Oil prices surge after Saudi Arabia and other producers agree to cut output

Non-OPEC countries, including Russia and Mexico, have now pledged to cut production

(Bloomberg)

Oil prices jumped to their highest since July 2015 after Saudi Arabia and a number of non-Opec countries, including Russia and Mexico, pledged to cut output, strengthening the coordinated commitment by the world’s largest producers to tighten supply.

Futures rose as much as 5.8 per cent in New York and 6.6 per cent in London.

Khalid Al-Falih, Saudi Arabia's energy minister, said Saturday the biggest crude exporter will “cut substantially to be below” the target agreed last month with members of Opec. Mr Al-Falih’s comments followed a deal by eleven non-Opec nations to join forces with the group and trim output by 558,000 barrels a day next year, the first pact between the rivals in 15 years.

Oil in New York has gained about 20 per cent since the Organization of Petroleum Exporting Countries announced on 30 November that it will cut output for the first time in eight years. Saudi Arabia, which led OPEC’s decision in 2014 to pump at will, is leading efforts to take back control of the market. The Opec and non-Opec plan encompasses countries that pump 60 per cent of the world’s crude, but excludes major producers such as the US, China, Canada and Brazil.

’This is a very powerful message that producers want to balance the market,’ said Chris Weston, chief market strategist at IG. “As a statement of intent, this is about as bullish as it gets.”

West Texas Intermediate for January delivery rose as much as $3.01 (£2.38) to $54.51 a barrel on the New York Mercantile Exchange, the highest intraday level since 6 July 2015. The contract was trading at $54.19 at 7.50am in London. Prices gained 3.5 per cent over the previous two sessions to close at $51.50 a barrel on Friday.

Brent for February settlement jumped as much as $3.56 to $57.89 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a $1.81 premium to February WTI.

Into Deficit

“Assuming reasonable compliance levels, these cuts will be enough to push the market into deficit,” Neil Beveridge, a senior analyst at Sanford C Bernstein in Hong Kong, said by e-mail. “This level of coordination is unprecedented.”

Oil and gas companies gained in Asia, with the MSCI AC Asia Pacific Energy sub-index rising 0.5 per cent, compared with a 0.6 per cent drop in the broader gauge. Chinese producer PetroChina added 0.7 per cent, while Australia’s Santos added 5.1 per cent and India’s Oil & Natural Gas rose 1.8 per cent.

“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,” Mr Al-Falih said Saturday in Vienna. The Saudi minister added that the country was ready to cut below 10 million barrels a day, a level it has sustained since March 2015.

Mr Al-Falih and his Russian counterpart Alexander Novak also revealed Saturday they have been working for nearly a year on the agreement, meeting multiple times in secret.

Opec agreed two weeks ago to reduce its own production by 1.2 million barrels a day, and Saudi Arabia has long insisted that any cuts by the group be accompanied by action from other suppliers.

“The reality is both Saudi and Russia desperately need higher prices with oil their number-one export,” said Michael McCarthy, chief market strategist at CMC Markets in Sydney. “Agile US shale producers will jump back into production on West Texas well before $60 a barrel.”

Data showed on Friday that US explorers rushed back to the shale patch, with the largest weekly addition of oil rigs since July 2015. Rigs targeting crude in the US rose by 21 to 498, the most since January, according to Baker Hughes.

A normalisation of crude inventories is the goal of the announced output cuts, rather than higher prices, which would “unleash a sharp production response” from global suppliers including the US, Goldman Sachs analysts, including Damien Courvalin, wrote in a research note dated 11 December.

Bloomberg