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Oil rockets past $50 after non-OPEC members joined deal

Oil news
Oil news

Oil jumped to the highest since July 2015 after Saudi Arabia signaled it’s ready to cut output more than earlier agreed while non-OPEC countries including Russia pledged to pump less next year, strengthening the coordinated commitment by the world’s largest producers to tighten supply.

Futures rose as much as 5.8 percent in New York and 6.6 percent in London. Saudi Energy Minister Khalid Al-Falih said Saturday the biggest crude exporter will “cut substantially to be below” the target agreed last month with members of OPEC. Al-Falih’s comments followed a deal by eleven non-OPEC countries including Mexico 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.

Futures in New York have gained about 20 percent since the Organization of Petroleum Exporting Countries announced Nov. 30 it will cut production 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 percent of the world’s crude, but excludes major producers such as the U.S., China, Canada, Norway and Brazil.

“This is a very powerful message that producers want to balance the market,” said Chris Weston, chief market strategist in Melbourne at IG Ltd. “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 to $54.51 a barrel on the New York Mercantile Exchange, the highest intraday level since July 6, 2015. The contract was trading at $53.96 at 1:04 p.m. in Hong Kong. Prices gained 3.5 percent 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 $1.82 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 in Asia gained, with the MSCI AC Asia Pacific Energy sub-index rising 0.7 percent, compared with a 0.4 percent decrease in the broader gauge. Chinese producer Cnooc Ltd. climbed 0.6 percent, while Australia’s Santos Ltd. added 5.1 percent and Japan’s Inpex Corp. advanced 0.6 percent.

“I can tell you with absolute certainty that effective Jan. 1 we’re going to cut and cut substantially to be below the level that we have committed to on Nov. 30,” 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.

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 two weeks ago agreed 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 U.S. shale producers will jump back into production on West Texas well before $60 a barrel.”

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

A normalization 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 U.S., Goldman Sachs Group Inc. analysts including Damien Courvalin wrote in a research note dated Dec. 11.

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