Global oil rose to an 18-month high overnight Monday after OPEC and some of its rivals reached their first deal in 15 years to reduce output to try and control global oversupply.
The surge – prices were up 6.5% at one stage – followed Saturday’s news that producers from outside the Organisation of the Petroleum Exporting Countries, led by Russia, agreed to reduce output by 558,000 barrels per day (bpd), short of the target of 600,000 bpd but still the largest non-OPEC contribution on record.
Oil shrugged off a weakening in the value of the US dollar ahead of the Fed meeting starting tonight, our time, with the post meeting statement to be issued after 4am Sydney time on Thursday.
That looming almost certain news of a rate increase finally hit sentiment in late trading – major markets were easier and our market will start in the red when trading resumes on the ASX shortly.
Oil prices rose despite some analysts pointing out that Russian output will fall, but only to levels earlier this year, and some other non-OPEC producers have factored in field decline (natural falls in output) instead of real actual reductions in production (say, buy shutting wells or fields).
Saturday’s deal followed OPEC’s November 30 deal to cut output by 1.2 million bpd for six months from January 1. Top exporter Saudi Arabia will cut around 486,000 bpd to reduce the supply glut that has dogged markets for two years, and has already told customers of lower allocations from next month.
In New York, US oil futures settled at their highest for nearly 17-months as January West Texas Intermediate crude rose $US1.33, or 2.6%, to settle at $US52.83 a barrel on the New York Mercantile Exchange.
In Europe Brent crude futures were up $US1.94 at $US56.27 a barrel, a 3.5% rise, after hitting a session peak of $US57.89, the highest since July 2015.
For the deal to be effective, all parties must stick to their word on reductions, something that has rarely happened in past deals of this kind.
Higher prices also increase the prospect of other producers boosting output, especially US shale operators, where oil and gas rig counts have grown steadily in recent months.
While US production remains about one million bpd below its peak of 9.6 million reached in 2015 US Energy Information Administration data show that output is up more than 200,000 barrels a day since the lows of May through August.
Brent crude futures are now up more than 20% in the last three weeks and US futures are up 30% since the November 9 election saw Trump win.
Wall Street and other markets had a good night, but the S&P 500 and Nasdaq turned lower late in the session and our market will start with a loss of around 20 points. That was after yesterday’s mixed session with a big early gained turned into a flat finish as Chinese shares sold off.
The Aussie dollar nudged to within sight of the 75 US cent mark, but it is hard going and the currency remains under pressure
Gold rose the first time in three sessions, after falling early on. But that small gain was eroding in early dealings in Asia.
But keep an eye on China’s stockmarkets, there are a few worries emerging after the surprise crackdown on stock purchases by insurance firms sent shares in Shanghai and Shenzhen sharply lower on Monday.
The main Shanghai Composite Index ended down 2.5%, the biggest one-day drop in percentage terms since June 13. The Shenzhen Composite Index ended 4.9% lower, and the startup-focused ChiNext board fell a large 5.5%.
Analysts say the sell off followed the news late Friday that China’s insurance regulator banned insurer Evergrande Life from further investing in stocks, saying it had been conducting short-term trading on the stock market.
The Financial Times says the recent stock investment spree by a few major insurers have helped boost trading activity in the Chinese markets.
Also on Friday, Foresea Life, an arm of Chinese financial conglomerate Baoneng Group, pledged to gradually reduce holdings in a Shenzhen-listed, home-appliance company. This would mean an unwinding of the stake-building activity that led to “harsh disapproval" from Chinese regulators.
Also today we get the latest Chinese production, investment and retail sales data which should confirm the economy remains OK.
But watch the investment figures for property and for any signs of a cooling in the growth.
More and more cities and other levels of government have been trying to cool the current boomlet and more signs of a slowdown in spending will be negative for commodity prices, especially iron ore and steel.
