Output deal fuels optimism for oil prices, energy stocks

Crude prices surged on Monday and propelled Canadian energy stocks sharply higher after non-OPEC countries agreed to cut production in co-operation with their Organization of Petroleum Exporting Countries 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.

Global oil pact sends prices soaring (Reuters)

West Texas intermediate settled up $1.33 (U.S.) at $52.83 a barrel, its highest since July, 2015. International benchmark Brent crude sold for as much as $57.22 a barrel.

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The moves added to growing confidence that a recovery is under way in the energy sector, which has endured more than two years of downturn. The collapse prompted a massive pullback in corporate spending, tens of thousands of layoffs in Western Canada and heavy pressure on the Alberta economy. Oil prices and shares of energy companies have climbed since late September, when OPEC agreed in principle to shift from protecting market share to limiting production as a way to lift oil prices.

Many analysts expect both OPEC and non-OPEC producers to cheat, but 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.

The Goldman Sachs analysts said WTI prices could rise above $60 (U.S.) but would likely recede back to $55 as U.S.-shale oil operators take advantage of the upturn to boost drilling activity.

Saudi Arabia and some of its allies within the cartel have produced at record volumes in recent months, putting the spotlight squarely on the signatories’ discipline, said Judith Dwarkin, chief economist at RS Energy Group.

“The track record is far from stellar, as is the track record of non-OPEC compliance with its pledges historically,” Ms. Dwarkin said.

If there is an overall reduction in the face of expected gains among oil producers that are not part of the deal, the chronic problem of growing stockpiles should ease in 2017.

“Stock draws go hand in hand with better prices, but you need a significant effective cut to really move the needle on pricing for next year because of this huge overhand of stocks,” she said.

Canadian energy shares surged more than 3 per cent before paring gains later in the session as investors looked to capitalize on the higher crude prices. The S&P/TSX capped energy index, which includes shares of integrated oil companies, independent producers and oil-field service providers, has jumped more than 10 per cent since OPEC finalized its deal to limit production at the end of last month.

Heavy-oil and oil-sands producers enjoyed some of the biggest gains on Monday, led by Baytex Energy Corp., up 9 per cent, MEG Energy Corp., up more than 6 per cent, and Husky Energy Inc., up 4 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 a day for six months from Jan. 1, with top exporter Saudi Arabia cutting around 486,000 barrels a day 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 a day, the largest ever planned production cut by non-OPEC countries.

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