Oil prices surged more than 4% today, with Brent crude at its highest in about 16 months, extending gains after OPEC and Russia agreed to restrict output to reduce the global supply glut more quickly.

The Organization of the Petroleum Exporting Countries agreed yesterday to its first oil output reduction since 2008 after the group's leading producer Saudi Arabia accepted "a big hit" and dropped a demand that arch-rival Iran also slash output.

The deal also included OPEC's first coordinated action in 15 years with non-member Russia.

Azerbaijan said it was also willing to discuss cuts. Doubts about the historic deal were widespread in the market.

"It remains to be seen how well they stick to the plan, but if OPEC hadn't come to an agreement the probability is that oil prices would have fallen to $40 a barrel, perhaps even lower," said Simon Flowers, chief analyst at consultancy Wood Mackenzie.

"Brent was trading at about $50 a barrel after the announcement, and we expect it to trade at an average of $55-$60 per barrel in 2017."

Benchmark Brent futures for February delivery jumped as much as 5.1% to $54.53 a barrel, the highest since 27 July, 2015.

By 5.28pm Irish time, Brent was up $2.34, or 4.5%, at $54.18 a barrel.

US crude rose $2.06, or 4.2%, to $51.50. Its session high was $51.80 a barrel, 13 cents below its 2016 high.

US refined products also rose along with crude - ultra low sulphur diesel (ULSD) futures soared as much as 5.5% to its highest in more than a year while gasoline futures jumped as much as 6%.

The OPEC deal triggered frenzied trading, with Brent futures hitting record trading volumes for February and March, when the supply cuts should start to be visible in the market.

 The Intercontinental Exchange Inc also said ICE Brent crude futures hit a daily volume record of 1.96 million contracts yesterday.
 

Even after today’s steep rise, oil prices remained about half their mid-2014 levels, when prices began to collapse to the lowest in a generation.

OPEC produces a third of global oil, or around 33.6 million bpd, and the deal aims to reduce output by 1.2 million bpd from January 2017, similar to January 2016 levels.

"It's clearly too soon to know what beyond the short-term market gain will be the consequences of this mini-renaissance of OPEC - for other producers and for the group itself," Credit Suisse analysts said.

Others noted that the cuts could leave the field open for other producers, especially US shale drillers.

"We do not believe that oil prices can sustainably remain above $55 per barrel, with global production responding first and foremost in the US," Goldman Sachs said.

The head of the International Energy Agency Fatih Birol warned of greater volatility after the OPEC deal.

"Unlike in the past OPEC decisions, if prices move to around $60, a substantial amount of oil in United states is ready to come to the markets," Mr Birol said.

Coinciding with the OPEC cuts, supply of the four major North Sea grades of crude oil will hit a one-year high next month, according to monthly loading programs.