Oil rose by as much as 6.5 per cent on Monday to an 18-month high after OPEC and some of its rivals reached their first deal since 2001 to jointly reduce output to try to tackle global oversupply and boost prices.
Brent crude futures <LCOc1> were up $2.21 at $56.54 per barrel by 1125 GMT, having hit a session peak of $57.89, the highest since July 2015.
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The price is 50 per cent higher than at this time last year, marking the largest year-on-year rise on any given day since September 2011.
U.S. crude futures <CLc1> were up $2.16 at $53.66 a barrel.
“OPEC have taken a very important step towards stopping the relentless build up in global stock levels and speeding up the rebalancing process, as long as compliance is strong, Libya and Nigeria fail to rebound and U.S. producers take time to respond,” PVM Oil Associates strategist David Hufton said.
“As things stand today, no cuts have been made and production is in fact still rising … from a fundamental point of view, it is difficult to justify the front-end price surge other than that is where the liquidity is and where speculative players, moving in herds, always prefer to place their bets.”
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After nearly a year of wrangling, the Organization of the Petroleum Exporting Countries agreed on Nov. 30 to cut output by 1.2 million bpd for six months from Jan. 1, with top exporter Saudi Arabia cutting around 486,000 bpd to curb the oversupply that has dogged markets for two years.
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On Saturday, producers from outside OPEC, led by Russia, agreed to reduce output by 558,000 bpd, short of the target of 600,000 bpd but still the largest contribution by non-OPEC ever.
But for the deal to be effective, all parties must stick to their word, analysts said.
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“We believe that the observation of the OPEC-11 and non-OPEC 11 production cuts is required to sustainably support… oil prices to our 1H17 WTI price forecast of $55 a barrel,” Goldman Sachs said.
“This forecast reflects an effective 1.0 million barrels per day (bpd) cut vs. the 1.6 million bpd announced cut and greater compliance to the announced cuts is therefore an upside risk to our forecasts.”
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Goldman Sachs forecast full compliance would be worth an extra $6 per barrel to its price forecast.
Higher prices raise the chances of other producers increasing output.
“There are too many moving parts for OPEC’s new policy to be sustainable in the long term. The strategy is bound to overshoot, in our view. leading to lower prices in the second half of next year,” Barclays said in a note on Monday.
Additional reporting by Florence Tan, Keith Wallis and Henning Gloystein in Singapore; Editing by Louise Heavens/Keith Weir