Oil prices ranged above $50 per barrel on Wednesday, with US futures reaching this level for the first time in a year, after a surprise million-barrel-per-day cut by Saudi Arabia following an Opec+ meeting.
The 'goodwill' gesture by the world's largest oil exporter will counter production increases from Russia and Kazakhstan over the coming two months.
The two producers have been given leeway to produce 75,000 bpd of collective output, considering the difficulties experienced in cutting production during winter months.
The move by Saudi Arabia, which its energy minister Prince Abdulaziz bin Salman described as "unilateral" and under the direction of Crown Prince Mohammed bin Salman, is atypical of its policy in recent months.
The kingdom, which heads the supervising joint ministerial monitoring committee of the alliance, has previously come down hard on producers who had violated their output quotas.
Prince Abdulaziz has also pushed for stricter, more collective action among producers since he assumed office in 2019.
The exemption granted to Moscow and Kazakhstan was described by Alexander Novak, Russia's Opec+ representative and deputy prime minister, as a "new year present".
Analysts remained cautious about the generous cut volunteered by Riyadh since higher prices following the tightening of demand is likely to encourage more crude production.
"Saudi Arabia had adopted a policy of not being willing to underwrite poor compliance by other producers so how long they will maintain these voluntary cuts will be a serious test of patience," Khatija Haque, head of research and chief economist at Emirates NBD said in a note on Wednesday.
Both benchmarks are trading above $50 for the first time in 11 months. Prices surged as high as 5 per cent following news of the rollover of cuts and the sizeable commitment from Saudi Arabia.
West Texas Intermediate was trading above $50 per barrel for the first time since February. The US benchmark tracking crude grade was up 1 per cent, trading at $50.43 per barrel at 2.50pm UAE time. Brent, the international marker, was up 1.53 per cent at $54.42 per barrel.
The latest production cut will lower Saudi Arabia's output to 8.119m bpd between February and March. Producers within the alliance will restrain 7.2m bpd of production for three months until March. The group's monitoring committee will convene on February 3 and March 3, followed by an extraordinary meeting of the producers on March 4, to assess compliance and any further need for supply cuts.
Opec+ had previously planned to bring 2m bpd of supply back to the markets from the beginning of 2021. The group deferred the increase at their annual meeting last month, taking into account lockdowns imposed across a number of developed nations.
The alliance is cautious as it charts future policy as a new mutant strain of Covid-19 threatens to derail rebounding crude demand. Global cases of Covid-19 have now exceeded 86.9 million, with major oil consumers such as the US, India, Brazil, Russia and the UK among the worst affected by the spread.
Opec+ has also been urging producers to not cash in on the recent surge in oil prices, stating they should continue monitoring the market for imbalances as a result of rising tally of coronavirus infections.