Dec 12, 2016 12:07PM EST – Markets buoyed by optimism that output cut will be adhered to, and bloated global inventories will shrink to more sustainable levels | published: Dec 12, 2016 11:58AM EST
Crude prices soared Monday morning and propelled Canadian oil stocks sharply higher after non-OPEC nations agreed to cut production in a deal with their OPEC rivals.
Markets were buoyed by optimism that the production agreement will be adhered to, and that bloated global inventories will shrink over the winter to more sustainable levels. Saudi Energy Minister Khalid el-Falih gave them a further boost when he said the kingdom is prepared to cut supply even further than it committed to in the Nov. 30 agreement among OPEC producers.
In trading Monday morning, West Texas Intermediate was up $1.76 (U.S.) to $53.26 per barrel, up 3.42 per cent. Earlier, the January WTI contract traded at $54.51, a level not seen since the middle of last year.
While many analysts expect both OPEC and non-OPEC producers to cheat, some pointed to the fact that Russia will be monitoring the non-OPEC compliance as evidence it will likely hold, and to the Saudi minister’s commitment to reduce output further if necessary. “This comment comforts us in our view that Saudi Arabia has a strong economic and fiscal incentive to cut production to achieve a normalization of inventories, even if it requires a larger unilateral cut,” Goldman Sachs analysts said in a note Monday.
Canadian energy shares surged 3 per cent as investors looked to capitalize on the higher crude prices, with the S&P/TSX capped energy index hitting its highest since May, 2015. The index, which includes shares of integrated oil companies, independent producers and oil field service providers, has jumped 12 per cent since OPEC struck its deal to limit production on Nov. 30.
Heavy oil and oil sands producers enjoyed some of the biggest gains on Monday, led by Baytex Energy Corp., up 11 per cent, MEG Energy Corp., up more than 10 per cent, and Cenovus Energy Inc., up more than 5 per cent.
After two years of downturn, momentum has suddenly shifted in favour of energy investors, said Martin Pelletier, portfolio manager at TriVest Wealth Counsel in Calgary.
“Saudi Arabia is fully intent on inflating oil prices and obviously they want it higher than where it is currently,” Mr. Pelletier said. “That’s only going to benefit [exploration and production companies] regardless of what forward valuation they are discounting in their current price.”
The members of the Organization of the Petroleum Exporting Countries agreed two weeks ago to cut output by 1.2 million barrels per day for six months from Jan. 1, with top exporter Saudi Arabia cutting around 486,000 bpd to curb the over-supply that has dogged markets for 30 months.
On Saturday, 11 producers from outside OPEC, including Russia, Kazakhstan, Azerbaijan, Mexico and Sudan, agreed to reduce output by 558,000 barrels per day, the largest ever planned production cut by non-OPEC countries.
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