Oil prices soared as much as 10 percent on Wednesday as some of the world's largest oil producers agreed to curb oil output for the first time since 2008 in a last-ditch bid to support prices.
However, they were unlikely to skyrocket further in reaction to the deal and the rally may even be short-lived, traders and analysts said.
The Organization of the Petroleum Exporting Countries agreed to cut production to 32.5 million barrels per day, Kuwait's oil minister said. The cuts include Iraq reducing output by 200,000 bpd to 4.351 million bpd beginning in January. The country had previously resisted cuts, providing a hurdle to an agreement.
The cut will put production at the low end of a preliminary agreement struck in Algiers in September, and will reduce output from a current 33.64 million bpd.
The group's de facto leader Saudi Arabia said it would take the lion's share of cuts — reducing output by almost 486,000 bpd to 10.06 million bpd — to get the deal done.
Iraq, OPEC's second largest producer which had previously resisted cuts, providing a hurdle to an agreement, agreed to reduce output by 200,000 bpd to 4.351 million bpd.
Iran was allowed to boost production slightly from its October level. This was a major victory for Tehran, which has long argued it needs to regain market share lost under Western sanctions.
Non-OPEC member Russia, which had long resisted cutting output and pushed its production to new record highs in recent months, agreed to cut output by 300,000 bpd. OPEC will meet with non-OPEC producers on Dec. 9.
Brent crude futures for delivery in January were up $4.07, or 8.8 percent, at $50.45 a barrel by 2:39 p.m. ET (1939 GMT). That contract expires Wednesday and was on pace for a gain of more than 4 percent on the month. Brent crude for delivery in February was up $4.40 at $51.72 a barrel.
U.S. West Texas Intermediate (WTI) crude futures settled up $4.21, or 9.3 percent, to $49.44 a barrel. The contract gained 5.5 percent in the month of November.
Oil prices will continue to strengthen on the deal, but sharp gains will be limited as market skepticism lingers about how effective the cuts will be.
"It's going to take time to see who's going to abide by those rules," said Oliver Sloup, director of managed futures at IITrader.com. In the past, not all producers have complied with agreements on supply cuts, Sloup said. As a result, there is skepticism about how closely the production caps will be adhered to.
Kuwait, Venezuela and Algeria have agreed to monitor compliance with the OPEC agreement.
U.S. production capabilities may also mute the price reaction, according to Viktor Nossek, director of research at Wisdomtree. "While prices may climb further in the very near term, we expect any gains will be short-lived, with U.S. production likely to ramp up to exploit higher prices."
The market will grow in a measured way because traders with short positions have already exited crude futures, according to Dominic Chirichella, senior partner at the Energy Management Institute.
"There's going to be an air of cautiousness and rightfully so," he said. "I think the market is going to move to the upside, but in a metered, cautious manner over a period of time."
The oil rally ricocheted through the market, with stocks and bond prices reaction to the move.
U.S.-listed oil companies including Exxon Mobil, Chevron and Schlumberger saw shares rise as crude prices climbed. Some U.S. producers saw shares spike more than 10 percent, includingPioneer Natural Resources, Hess and Anadarko Petroleum.
Deferred spreads for U.S. and Brent crude futures also rallied on the OPEC deal.
The WTI Dec 2017 to Dec 2018 spread rallied to as much as negative 39 cents from negative $1.26 a barrel on Tuesday. Meanwhile, the Brent Dec 2017 to Dec 2018 spread rallied to as much as negative $1.04 a barrel from negative $1.87 a barrel on Tuesday.
A weekly government report on U.S. crude oil stockpiles had little sway in the market, which remained focused on the OPEC deal. U.S. crude stockpiles unexpectedly fell 884,000 barrels in the week, compared with forecasts of a 636,000-barrel increase.
Distillate stockpiles, which include diesel and heating oil, rose by 5 million barrels, versus expectations for a 1.3 million-barrel increase, the EIA data showed. Gasoline stocks rose by 2.1 million barrels, compared with analysts' expectations in a Reuters poll for a 1.2 million-barrel gain.