Oil hits highest since mid-2015 as global producers agree to cut

By David Gaffen

NEW YORK (Reuters) - Oil rose to an 18-month high on Monday after OPEC and some of its rivals reached their first deal since 2001 to jointly reduce output to tackle global oversupply.

On Saturday, producers from outside the Organization of the Petroleum Exporting Countries, led by Russia, agreed to reduce output by 558,000 barrels per day, short of the target of 600,000 bpd but still the largest non-OPEC contribution ever.

That followed OPEC's Nov. 30 deal to cut output by 1.2 million bpd for six months from Jan. 1. Top exporter Saudi Arabia will cut around 486,000 bpd to reduce the supply glut that has dogged markets for two years.

Crude futures have rallied sharply, with U.S. oil futures gaining 23 percent since the middle of November as optimism that an agreement would be reached started to grow. On Monday, U.S. crude futures were up $1.73 at $53.24 a barrel, a 3.4 percent gain, as of 1:57 pm ET (1957 GMT).

"Right now the market is kind of feeding on itself," said Gene McGillian, manager of market research at Tradition Energy in Stamford, Connecticut.

"The market could push another $1 to $2 up to $55, and Brent could go to about $60, but at that point there are some concerns that are going to start to cap the rally."

Brent crude futures were up $1.76 at $56.09 per barrel, a 3.2 percent rise, after hitting a session peak of $57.89, the highest since July 2015.

For the deal to be effective, all parties must stick to their word. Higher prices also raise the chances of other producers boosting output, particularly U.S. shale operators, where rig counts have grown steadily in recent months. U.S. production remains about 1 million bpd below its peak of 9.6 million reached in 2015, according to U.S. Energy Department data.

Further, several of the non-OPEC countries are still increasing their production. Russia, for instance, does not expect to reach its target until April or May, and several other countries are expected to experience only natural declines, which will not necessarily affect the supply situation.

PVM Oil Associates strategist David Hufton noted that "as things stand today, no cuts have been made and production is in fact still rising." He said it was difficult to "justify the front-end price surge other than that is where the liquidity is and where speculative players, moving in herds, always prefer to place their bets."

(Additional reporting by Florence Tan, Keith Wallis and Henning Gloystein in SINGAPORE; Editing by Chizu Nomiyama and Jonathan Oatis)