Oil pact could stem crude glut

Oil surged after a landmark deal by Russia and other non-OPEC producers to join the cartel in capping output. They agreed to reduce their production by more than half a million barrels per day. This is a much desired step to stem the global glut that has hammered prices.
The agreements, if implemented, would hasten the market’s return to balance by working off the inventory overhang.
Russia and 10 other states announced to reduce their production by more than half a million barrels per day (bpd), the Organization of the Petroleum Exporting Countries said.
The recent deals are the first joint cuts by OPEC and non-OPEC nations since 2001 and aim to reduce production by just under 1.8 million barrels per day (mbd). “This is a very strong message that producers want to balance the market higher,” said Chris Weston, chief market strategist in Melbourne at IG, told Bloomberg News.
OPEC members had agreed to collectively reduce output by 1.2 million bpd beginning in January. The OEC-non OPEC deal appears more striking as it has been reached after previous failure.
Crude futures jumped to the highest since July 2015 on Monday. Brent soared as much as 6.6 percent to $57.89 a barrel. West Texas Intermediate advanced as much as 5.8 percent. It is the biggest gain since November 30 OPEC deal.
Oil-exporting currencies lead gains against the dollar. The Russian ruble gained 2.2 percent and the Norwegian krone and Mexican peso advancing 0.6 percent. The Korean won retreated for a second session, losing 0.2 percent amid concern the political instability sparked by President Park Geun-hye’s impeachment could hurt the economy
OPEC kingpin Saudi Arabia also announced at the weekend that it will slash production beyond what was previously agreed in Vienna by OPEC, providing an additional boost for prices.
“The country is also preparing a partial flotation of its crown jewel in 2018, the state-owned oil company Saudi Aramco, and that certainly serves as an incentive for the oil giant,” said IG market strategist Jingyi Pan.
Pan noted prices have hit their highest since February 2015 and any concerns about compliance have been put on a back burner.
Also, most energy firms in Asia jumped after non-OPEC countries’ announcement of cuts in crude production
Tokyo ended up 0.8 percent but Hong Kong lost 1.4 percent and Shanghai shed 2.5 percent. Sydney was flat, while Seoul closed 0.1 percent higher, Singapore slipped 0.4 percent and Manila lost more than two percent.
On currency exchanges the dollar rallied ahead of an expected US interest rate hike this week by the Federal Reserve.
The greenback has surged in the past month on expectations of higher borrowing costs, with President-elect Donald Trump’s promises of big spending and tax cuts fanning talk of a surge in inflation.
In early European trade London rose 0.2 percent and Paris put on 0.1 percent while Frankfurt was flat.
OPEC and non-OPEC’s signing of the production cut deal is clearly the catalyst. If all the 24 nations involved in Saturday’s deal deliver on their promises, the market could turn from three years of oversupply into deficit in the next few months.
The crude prices have already doubled since January. And a further run up would be felt through the global economy. It will ease pressure on the budgets of oil producers and consumers’ spending.