By Neanda Salvaterra and Jenny W. Hsu
Oil prices surged Monday after more oil-producing nations agreed
to slash production, a move aimed at pushing the oversupplied oil
market into a rebalance, or even a deficit, to prop up a crude
market that had been stuck in a two-year slump.
U.S. crude futures rose $1.88, or 3.65%, to $53.38 a barrel on
the New York Mercantile Exchange. Brent, the global benchmark, was
up $1.93, or 3.55%, at $56.26 a barrel on London's ICE Futures
Exchange.
Energy stocks also soared on the news. In London, Royal Dutch
Shell PLC was up 2.4% while in Milan, Eni SpA traded 4.28% higher.
U.S. shale producers like Pioneer Natural Resources, and oil-field
services firms like Halliburton Co. have also gained.
Over the weekend, a group of heavyweight producers outside of
the Organization of the Petroleum Exporting Countries, including
Russia, agreed to scale back their output by 558,000 barrels a day.
The move would come on top of the cut of 1.2 million barrels a day
agreed to by OPEC in late November. The total reduction represents
almost 2% of the global supply.
The deal is viewed as a feather in the cap for Saudi Arabia the
oil cartel's de facto leader and the world's largest crude
producer.
"It has been the long-term goal of Saudi Arabia to get the
involvement of Russia and this has been a major geopolitical
development and I think it is historic," said Olivier Jakob an
analyst from the Switzerland-based consultancy Petromatrix.
"Russia has been very linked to Iran and with this latest
development it is also reaching out a little bit to the wider gulf
area," said Mr. Jakob.
The non-OPEC cuts, if carried out as described over the first
half of 2017, would represent an unprecedented level of cooperation
among oil-producing countries that have been groping for ways to
lift oil prices out of a two-year funk.
"This is truly a historic event," Russian Energy Minister
Alexander Novak said. "It is the first time that so many
oil-producing countries from different parts of the world have
gathered in one room to accomplish what we have done."
The bulk of the cuts -- 300,000 barrels a day -- have been
pledged by Russia, which produces more crude oil than any other
country. Other output reductions are promised by 10 other
countries, including Oman, Azerbaijan and Sudan.
West Texas Intermediate, the U.S. benchmark, climbed as high as
$54.51 in earlier trading before pulling back.
"It definitely jumped the markets, there's no doubt about that,"
said Mark Waggoner, president of Excel Futures. "I think it was a
bit of a knee-jerk reaction."
Bernstein Research noted that some of the non-OPEC supply cuts
would come from natural decline but that most would come from
self-imposed cuts.
The market got an extra boost of confidence on reports that
Saudi Arabia indicated that, if necessary, the kingdom may be
willing to take a deeper cut than the 486,000-barrel cut it had
agreed in the November meeting.
"The latest development is buoying optimism in the market. It
shows that the OPEC has overcome a significant hurdle," said Vivek
Dhar, a commodities strategist at Commonwealth Bank of
Australia.
However, he also warned that compliance by the agreed parties
remains a glaring downside risk, given these oil producers haven't
always been forthcoming about their production levels, despite
their pledges to rein in output.
The production-cut deal will take effect Jan. 1, and the oil
producers will reconvene in six month to assess the deal.
"At this stage, the safe assumption is that they will be
[compliant], especially, in the first few months," said Ric
Spooner, chief market analyst at CMC Markets.
Another concern is how fast the U.S. shale producers will ramp
up their production in a bid to capture the higher prices.
"Last week the U.S. oil rig count rose by 21 rigs to 498 which
was the biggest one week gain since July 2015", noted SEB Markets
in a recent report.
"Our main concern is that market has become comfortably numb in
relation to rising rig counts," said Bjarne Schieldrop, chief
commodities analyst at SEB Markets.
"We won't really see any physical supply response from the added
rigs before the second half of 2017. I think this is setting in
motion a new boom and bust cycle with a big rise in oil rigs," said
Mr. Schieldrop.
Higher oil prices are also ramping up inflation expectations,
pushing yields on government bonds higher early Monday, with the
yield on the 10-year U.S. Treasury last at 2.426% after a sharp
rise on Friday to 2.469%. The yield on a similar bond in Japan
reached its highest level since mid-February, last at 0.070%
compared with 0.056% Friday. Yields rise as prices fall.
The weekend's deal "clearly is going to secure inflationary
pressures" going into the first quarter of 2017, said Stuart Ive, a
private client manager at OM Financial Ltd. in New Zealand.
Gasoline futures rose 5.613 cents, or 3.74%, to $1.5636 a
gallon. DIesel futures rose 5.29 cents, or 3.23%, to $1.6903 a
gallon.
Alison Sider, Benoit Faucon, Nathan Hodge, Summer Said, Willa
Plank and Rachel Rosenthal contributed to this article.
Write to Neanda Salvaterra at neanda.salvaterra@wsj.com and
Jenny W. Hsu at jenny.hsu@wsj.com
(END) Dow Jones Newswires
December 12, 2016 11:06 ET (16:06 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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