Oil rose by as much as 6.5 percent on Monday to an 18-month high after OPEC and some of its rivals reached their first deal since 2001 to jointly reduce output to try to tackle global oversupply and boost prices.
Oil producers are looking to curb the worldwide glut, which sent the price of crude from $100 per barrel in the summer of 2014 to $27 in February and has ravaged the government finances of Saudi Arabia, Russia and others. Investors boosted bullish crude bets in the run up to the November 30 deal.
In its last monthly report in November, the IEA warned that without any sort of cut, 2017 could witness another year of "relentless supply growth" from non-OPEC producers. Data from Zero Hedge, a United States economic blogger website, show that in the 17 OPEC agreements to cut output from 1982 to 2009, only about 60 percent of the "targets" were achieved. The Saudi minister added that the country was ready to take production below 10 million barrels a day, a level it has sustained since March 2015.
For the first time, Organisation of Petroleum Exporting Countries (Opec) has teamed up with 11 non-Opec members in a deal that could spoil the party for net importers of crude oil. The price rally has led to predictions of a production revival in the US, where shale output from seven fields may increase next month, a report showed.
U.S. West Texas Intermediate (WTI) crude also hit a July 2015 high of $54.51 a barrel. All three closed at record highs on Friday.
Brent crude, the global benchmark for oil prices, soared to $57.89 per barrel in overnight trading between Sunday and Monday, the highest level since July 2015.
"It has been the long-term goal of Saudi Arabia to get the involvement of Russian Federation and this has been a major geopolitical development and I think it is historic", said Olivier Jakob an analyst from the Switzerland-based consultancy Petromatrix.
FED WATCH: Economists and investors are widely expecting the Federal Reserve to raise interest rates at its two-day policy meeting this week, which ends Wednesday.
"Right now the market is kind of feeding on itself", said Gene McGillian, manager of market research at Tradition Energy in Stamford, Connecticut. "There are doubts about how closely OPEC will adhere to its targets". If they didn't come to the table and say this OPEC members would vocalize their disappointment, but eventually we expect them to do that anyway. OPEC two weeks ago agreed to reduce its own production by 1.2 MMbopd, and Saudi Arabia has long insisted that any cuts by the group be accompanied by action from other suppliers.
Due to the expectations of an inventory correction, oil prices have rallied of late with Brent oil now trading at more than $53 a barrel as compared to just $35 per barrel at the beginning of the year. Supplies remain at the highest seasonal level in weekly data compiled by the EIA since 1982.
With the deal signed after nearly a year of arguing within the Organization of the Petroleum Exporting Countries and mistrust in the willingness of non-OPEC Russia to participate, focus is switching to compliance of the agreement.
Now, the possibility of BP breaking even at a $50 per barrel oil price does not look out of question since it will be bringing online a substantial production from new sources.