Oil prices shot up by 4 per cent to their highest level since 2015 early on Monday after Organization of the Petroleum Exporting Countries (OPEC) and other producers over the weekend reached their first deal since 2001 to jointly reduce output in order to rein in oversupply and prop up the market.
Brent crude futures, the international benchmark for oil prices, soared to $57.89 per barrel in overnight trading between Sunday and Monday, its highest level since July 2015.
U.S. West Texas Intermediate (WTI) crude futures also hit a July 2015 high of $54.51 a barrel.
Brent and WTI prices eased to $56.55 and $53.70 respectively by 0043 GMT, but were both still up more than 4 per cent from their last settlement.
With the deal finally signed after almost a year of arguing within the OPEC and mistrust in the willingness of non-OPEC Russia to play ball, the market's focus will now switch to compliance of the agreement.
AB Bernstein said that the agreed deal “amounts to an aggregate supply cut of 1.76 million barrels per day (bpd) from24 countries which currently produce 52.6 million bpd or 54percent of world oil supply.”
Bernstein said that “some of the non-OPEC supply cuts will come from natural decline, but most will come from self-imposed cuts.
ANZ bank said on Monday that Saudi Aramco, Saudi Arabia's state-controlled oil company, had “started informing customers that their allocations would be reduced in January 2017, in line with its commitment to the recent OPEC production cut agreement.”
OPEC has said it will slash output by 1.2 million bpd from Jan. 1, with top exporter Saudi Arabia cutting around 486,000 bpd in a bid to end overproduction that has dogged markets for two years.
On Saturday, producers from outside OPEC agreed to reduce output by 558,000 bpd, short of the initial target of 600,000 bpd but still the largest contribution by non-OPEC ever.
Of that, Russia said it would gradually cut 300,000 bpd, adding that by the end of March it would be producing 200,000 bpd less than its October 2016 level of 11.247 million bpd.
Russian output would fall to 10.947 million bpd after six months, it said. “Once cuts are implemented at the start of 2017, oil markets will shift from surplus into deficit. Given the cuts in production announced by OPEC, we expect that markets will move into a 0.8 million bpd deficit in 1H17,” AB Bernstein said.