NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled off their intraday highs Monday afternoon after a crucial weekend agreement by major oil producing countries to cut production fueled an extended rally that pushed spot-month West Texas Intermediate crude contract to a 1-1/2-year high.
The trigger for the oil rally was a deal signed on Saturday (12/10) by nonmembers of Organization of Petroleum Exporting Countries to reduce their output by a combined 558,000 bpd effective Jan. 1, 2017, with Russia accounting for 300,000 bpd of the cuts and Mexico 80,000 bpd.
The cuts will run for six months and could be extended for another six months depending on market conditions, said Russian Energy Minister Alexander Novak, who is one of the architects of the deal. Novak said there could be more non-OPEC producers implementing the production cuts beyond the 11 non-OPEC producers who signed the agreement in Vienna on Saturday (12/10).
Separately, Saudi Arabian Energy Minister Khalid al-Falih said the Kingdom intends to make further cuts to its output beyond the 486,000 bpd 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.
This is the first production cut agreement by non-OPEC since 2001. It follows the Nov. 30 agreement by OPEC to cut their own production by 1.2 million bpd to 32.5 million bpd starting in the New Year, which was also the first agreement in eight years by the oil cartel to slash its output.
Analysts said these recent deals shows OPEC and non-OPEC producers have overcome a significant hurdle and regained market confidence, citing the Saudi pledge to make deeper cuts to its supply than it had agreed to at the Nov. 30 OPEC meeting.
However, the analysts also warned that compliance to the agreed cuts could be an issue since OPEC has a long record of cheating and 15 years ago Russia broke its promise to join OPEC in cutting its output, a move that sent prices tumbling.
Moreover, higher oil prices would increase the chances of other U.S. shale operators to pump more oil, offsetting any OPEC cuts. U.S. rig counts have grown steadily in recent months.
Baker Hughes reported on Friday (12/9) that the number of rigs for oil drilling in the United States increased by a sharp 21 last week to a 498 nearly 11-month high.
At settlement, NYMEX January WTI crude oil futures were $1.33 higher at $52.75 bbl, having surged to a $54.51 session high. February Brent crude oil futures on the IntercontinentalExchange closed $1.36 higher on the day at $55.69 bbl.
In products trade, NYMEX January ULSD futures gained 3.43cts or 2.0% to $1.6717 gallon, pivoting off a $1.7106 session high, and the January RBOB contract settled up 3.57cts at $1.5430 gallon.
George Orwel can be reached at firstname.lastname@example.org
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