NEW YORK (DTN) -- New York Mercantile Exchange oil futures added to the overnight rally at the start of the regular trading session Monday, surging on the back of a weakening dollar and promises by major oil producers to make deep cuts in their oil supply.
The dollar angled off a two-week high, although the market still expects the greenback to rally again as the Federal Reserve looks set to raise its key short-term interest rates later this week.
The main driver for the rally is a deal over the weekend by nonmembers of Organization of Petroleum Exporting Countries to reduce output. On Saturday (12/10), OPEC and non-OPEC ministers met in Vienna to work out details of their joint supply policy.
After the meeting, OPEC issued a statement announcing that no-OPEC producers had agreed to cut their output by a combined 558,000 bpd, effective Jan. 1, 2017 for six months. The terms of the deal allow for a six-month extension of the cuts depending on market conditions.
Separately, Saudi Arabian Energy Minister Khalid al-Falih said the Kingdom intends to make further output beyond the 4.7% reduction it had already agreed to over a week ago. Falih gave no details about the additional cuts, but the Saudis last week notified their customers in Europe and the United States to expect less supply next month.
The non-OPEC agreement reached on Saturday was signed by Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russian, Sudan, and South Sudan. This would be the first cut in eight years by both OPEC and non-OPEC producers.
Analysts said this shows OPEC has overcome a significant hurdle and regained market confidence, citing the Saudi pledge to make deeper cuts to its supply than it had initially agreed to at the Nov. 30 OPEC meeting.
However, the analysts also warned that compliance to the agreed cuts remains a downside risk since OPEC has a poor track record of honoring its agreed-to quota restrictions. It took months for cartel members to agree to these modest supply cuts, it could take more to actually implement the terms of the deal, analysts believe.
At last glance, NYMEX January WTI crude futures were trading $2.25 higher or 4.4% at $52.75 bbl, off a 1-1/2-year high of $54.51, and the February Brent crude futures contract on the IntercontinentalExchange rallied $2.19 or 4% to $56.52 bbl.
In products trade, NYMEX January ULSD futures jumped 5.70cts or 3.5% to $1.6944 gallon, and the frontline RBOB futures contract was up 5.34cts trading $1.5607 gallon.
George Orwel can be reached at email@example.com
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