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December 13, 2016

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Oil prices surge to 2-month high as production cut

OIL prices surged to their highest since mid-2015 and US Treasury yields hit a more than two-year peak yesterday after the world’s top crude producers agreed to the first joint output cut since 2001.

Coming at the start of a week when the United States is expected to raise interest rates for only the second time since the global financial crisis, the weekend agreement between the Organization of Petroleum Exporting Countries and key non-OPEC states set the markets alive.

Brent oil futures soared 5 percent to top US$57 a barrel for the first time since July 2015 and US crude leapt above US$54 a barrel to send global inflation gauges spiking as well.

There was particular surprise as Saudi Arabia, the world’s number one producer, said it may cut its output even more than it had first suggested at an OPEC meeting just over a week ago.

“The original OPEC deal pointed to a fairly lumpy 3 percent cut (in production), so this suggests there is a bit more upside for oil prices,” said Neil Williams, chief economist at fund manager Hermes. On the rise in bond yields, which tend to set global borrowing costs, he added, “The Fed hike is mostly baked in so when we do get it, it will be more about the statement.”

European oil companies jumped more than 2 percent on the oil surge and helped the pan-regional STOXX50 index add 0.1 percent, having just had its best week in exactly five years. Bond markets in contrast were under heavy pressure. Eurozone government bond yields were sharply higher with German Bunds up 5 basis points at 0.40 percent as US yields topped 2.5 percent for the first time since October 2014.

“We have seen OPEC and non-OPEC producers agreeing, which is boosting reflation expectations around the world,” said Chris Weston, an institutional dealer with IG Markets.

In another sign of the reflation trade, breakeven rates — the gap between yields of five-year US debt and a matching tenor in inflation-protected securities — were at two-month highs.


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