Oil price surges to highest since July 2015 on deal to cut output

Brent futures are likely to rise to as high as $70 a barrel next year, averaging $61 a barrel for the year, according to Bank of America Merrill Lynch forecasts. Lucy Nicholson / Reuters

Oil prices leapt on Monday to their highest level since July last year, on the back of Saturday’s agreement by Russia and other non-Opec oil producers to cut output.

However, exuberance over the deal, which follows a similar agreement by Opec producers two weeks ago, masks scepticism over its efficacy and longer-term impact on oil revenues.

The agreement, in which producers including Russia, Sudan and Equatorial Guinea agree to cut oil output levels by 558,000 per day, sent futures contracts soaring by nearly 7 per cent on Monday morning.

Brent crude rose as high as US$57.89 a barrel, with West Texas Intermediate rising as high as $54.51, as traders celebrated a rare agreement on production levels between Opec and non-Opec members.

“The steep drop in oil prices over the last few years can be partly traced back to the ‘price war’ inside the Opec cartel,” said Francisco Blanch, a commodity and derivative strategist at Bank of America Merrill Lynch (BAML). “It looks to us like the war is over.”

Brent futures are likely to rise to as high as $70 a barrel next year, averaging $61 a barrel for the year, according to BAML forecasts.

But while prices are likely to rally in the short term, concerns remain over the ability or willingness of producers to stick to their individual production levels, and to make sure that others do the same.

“It wouldn’t be a surprise to see hit prices hit $60 in the next weeks, given that rhetoric has been pretty strong so far and everyone seems pretty committed,” said Thomas Pugh, a commodities economist at Capital Economics, in a telephone interview.

“However, we won’t know ultimately whether production has actually fallen until around March and there could be some disappointment in the market if it hasn’t fallen off a cliff like people are expecting it to.”

Such disappointments could see oil markets sharply correct in the new year.

“We fear that the delight of oil producers at the high oil price will soon be tarnished and will take its ‘revenge’ when market sentiment shifts again,” said analysts from Commerzbank in a research note.

“We are convinced that the expectations relating to voluntary production cuts, which have been driven to excessively high levels in recent weeks by oil producers, cannot be fulfilled.”

The impact of on Monday’s oil price rise on Arabian Gulf stocks was mixed: UAE bourses, which resumed trading after a holiday commemorating the Prophet’s birthday on Sunday, posted strong gains, while Saudi Arabian stocks ended the day lower.

Shares in Dubai rallied to their highest level of the year, closing up by 2.8 per cent to 3,657.11.

Emaar Properties hit its highest level since August last year, climbing by 5.1 per cent to Dh7.78, with fellow real estate names Union Properties and Deyaar Development also posting strong gains.

Taqa was one of the best performers in Abu Dhabi on Monday, its shares closing up by 5.7 per cent at 56 fils. Shares in fellow energy company Dana Gas rose by 1.8 per cent in early trading but retreated to end the day unchanged.

Shares in Saudi Arabia, which gained by 1.1 per cent on Sunday in the immediate aftermath of the non-Opec deal, finished 0.5 per cent lower as investors booked profits. Petrochemicals giant Sabic, whose shares came within touching distance of their high for the year on Sunday, fell by 1.4 per cent on Monday.

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