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Oil hits highest price since mid-2015 as global producers agree to cut

  • Author: Caroline Valetkevitch, Reuters
  • Updated: December 12, 2016
  • Published December 12, 2016

NEW YORK – Oil prices surged to an 18-month high on Monday after the world's top crude producers agreed to the first joint output cut since 2001, sparking concerns about inflation, which pushed up U.S. Treasury yields to a more than two-year peak.

Yields also gained ahead of a two-day Federal Reserve policy meeting that starts on Tuesday, where the U.S. central bank is expected to raise interest rates for the only the second time since the global financial crisis.

The gain in oil prices followed the weekend agreement between OPEC and key non-OPEC states. U.S. crude futures rose $1.33 to settle at $52.83 a barrel, a 2.6 percent gain, though that was sharply off the day's highs.

Brent crude futures rose $1.36 to settle at $55.69, a 2.5 percent rise, after hitting a session peak of $57.89, the highest since July 2015.

There was particular surprise as Saudi Arabia, the world's top producer, said it may cut its output even more than it had first suggested at an Organization of the Petroleum Exporting Countries meeting just over a week ago.

Energy shares jumped, helping lift the Dow Jones industrial average and S&P 500 to record intraday highs in early trading. The S&P 500 was last down slightly, with consumer discretionary shares among the biggest drags.

On Saturday, producers from outside the Organization of the Petroleum Exporting Countries, led by Russia, agreed to reduce output by 558,000 barrels per day, short of the target of 600,000 bpd but still the largest non-OPEC contribution ever.

That followed OPEC's Nov. 30 deal to cut output by 1.2 million bpd for six months from Jan. 1. Top exporter Saudi Arabia will cut around 486,000 bpd to reduce the supply glut that has dogged markets for two years.

Crude futures have rallied sharply, with U.S. oil futures gaining 23 percent since the middle of November as optimism that an agreement would be reached started to grow. On Monday, U.S. crude futures were up $1.73 at $53.24 a barrel, a 3.4 percent gain, as of 1:57 pm ET.

"Right now the market is kind of feeding on itself," said Gene McGillian, manager of market research at Tradition Energy in Stamford, Connecticut.

"The market could push another $1 to $2 up to $55, and Brent could go to about $60, but at that point there are some concerns that are going to start to cap the rally."

Brent crude futures were up $1.76 at $56.09 per barrel, a 3.2 percent rise, after hitting a session peak of $57.89, the highest since July 2015.

For the deal to be effective, all parties must stick to their word. Higher prices also raise the chances of other producers boosting output, particularly U.S. shale operators, where rig counts have grown steadily in recent months. U.S. production remains about 1 million bpd below its peak of 9.6 million reached in 2015, according to U.S. Energy Department data.

Further, several of the non-OPEC countries are still increasing their production. Russia, for instance, does not expect to reach its target until April or May, and several other countries are expected to experience only natural declines, which will not necessarily affect the supply situation.

PVM Oil Associates strategist David Hufton noted that "as things stand today, no cuts have been made and production is in fact still rising." He said it was 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."

(Additional reporting by Florence Tan, Keith Wallis and Henning Gloystein in Singapore.)

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