West Texas Intermediate surged 5.35% to $US47.06/bbl and Brent by as much as 6.5% to $48.96/bbl after OPEC agreed to cut oil production to a range of 32.5 million barrels of oil per day to 33MMbpd.
The previously belligerent Saudi Arabia will give up 350,000bopd, according to a senior OPEC source quoting the final proposal.
Iranian oil minister Bijan Zanganeh, whose country was exempted from the production cuts along with Nigeria and Libya whose oil facilities have been damaged by terrorist attacks, announced overnight that OPEC had decided to decrease production by around 700,000bopd from August's record levels.
While the move will effectively re-establish the cartel's production ceilings that were abandoned a year ago, exactly how much each country will produce at the revised levels will be nutted out at the next formal OPEC meeting next month, when Russia will be invited to join in the cuts.
That's unlikely, given Russian output hit a new post-Soviet record of a 11.1MMbopd this month, up 400,000bopd from August. Russia was in attendance at OPEC's talks on the sidelines of the sidelines of the International Energy Forum in Algiers, but was not an official party to the deal.
Shares of oilers rallied on the news, with Santos, heavily leveraged to oil, enjoying the biggest gain of 9.38% this morning to $3.72/share.
Beach (up 8.33% to 65c), Oil Search (up 5.96% to $6.93) and Woodside Petroleum (up 4.45% to $27.72) were the ASX's other biggest oil and gas movers overnight.
In New York trading, PNG LNG operator ExxonMobil shares experienced a 4.4% sugar hit, its biggest one-day increase since February, though oil prices are still nearly 60% below their 2014 peak.
The cut was also relatively modest considering the International Energy Agency said earlier this year that global oil stocks hit a record high of 3 billion barrels, and analysts say it could take until 2018 to clear the glut.
"The cartel proved that it still matters even in the age of shale. This is the end of the ‘production war' and OPEC claims victory," Price Futures Group senior energy analyst Phil Flynn said.
The claim of an OPEC victory would seem a bit of a stretch given it's widely believed the country moved because it's feeling the pinch from its own stubbornness not to act to manage prices.
Saudi Arabia's foreign exchange reserves have dropped 20% in the last two years to $587 billion through March, the last month for which International Monetary Fund data was available, and the kingdom announced on Monday it would cut ministers' pay by 20% and cut back perks for public sector employees who make up two-thirds of its workforce.
"The big takeaway is how into a corner the Saudis have backed themselves," Again Capital founding partner John Kilduff told CNBC yesterday.
"This whole plan has backfired on them. They're going to be bearing most of the cutback if they pull it off, and they've had to really kowtow to the Iranians in this whole thing."
Societe Generale's New York-based head of oil market research, Mike Wittner, said the cut was "clearly bullish", but "what's more important is that the Saudis appear to be returning to a period of market management".
The mood defied that of trader Vitol Group chief Ian Taylor, who warned a Bloomberg conference in London this week that the crude market could stay oversupplied unless producing countries stop flooding the market with oil.
Others, meanwhile, are sceptical that OPEC will follow through, particularly given the animosity between the Saudis and Iran, which had said the day before the Algeria meeting that it was not ready to agree to a production freeze, even at the current high levels.
"OPEC showed once again it can deftly manage market sentiment with verbal intervention," Bloomberg quoted Washington consultancy The Rapidan Group founder Bob McNally as saying.
"As to whether it will implement real supply management, details and time will tell but that is hardly certain from the Algiers meeting outcome."
