OPEC deal gives oil best day in seven years

U.S. oil prices saw their biggest dollar gain in more than seven years on news that OPEC nations Wednesday reached a milestone deal to cut oil production, potentially signaling the beginning of a slow recovery for the U.S. energy sector left decimated by low oil prices for two years.

Crude jumped $4.21 a barrel, or about 9 percent, to settle at $49.44 in New York. It was the biggest dollar increase since April  2,2009 when the price of a barrel of oil rose $4.25.

The Organization of the Petroleum Exporting Countries compromised on an agreement to cut production by 1.2 million barrels a day during a meeting Wednesday in Vienna. OPEC’s first cut in eight years is less than a rumored 1.4 million barrel daily reduction, but much more than the tentative deal in September to cut production by 750,000 barrels.

The deal is contingent on key non-OPEC producers also agreeing to cut production by 600,000 barrels, and Russia has already said it would reduce its production by 300,000 barrels, according to OPEC.

The news pushed U.S. oil prices up by almost $4 a barrel on Wednesday morning. U.S. crude inventory levels also fell by about 900,000 barrels, offering further relief on the oversupplies of crude oil, according to the Energy Department.

The OPEC deal was unanimous after Indonesia was suspended from OPEC for its inability to agree to a production cut. The six-month deal that can be extended another six months begins in January to cut OPEC production to 32.5 million barrels daily, including Indonesia’s October levels.

The two-year energy downturn has cost the U.S. more than 150,000 jobs and hundreds of bankruptcy filings, with Texas feeling the brunt of the pain.

The new OPEC accord means nearly half of the reduction coming from Saudi Arabia, with rival Iran agreeing to eventually  freeze production and Iraq also accepting a cut.

A 1.2 million per barrel cut would bring OPEC production down to roughly 32.5 million barrels daily, but the elimination of Indonesia would push the floor below 32 million barrels.

The oil bust really kicked in two years ago after Saudi Arabia decided to increase crude production in the face of falling oil prices, causing the dollar value of a barrel of crude to plummet much further. The OPEC fight for market share with growing U.S. producers and other nations created a global glut of oil, and Saudi Arabia abandoned its traditional role in price control. The North American shale revolution squeezed OPEC nations as U.S. production skyrocketed in recent years.

U.S. oil prices peaked at $107 a barrel in June 2014, but plunged to a low of $26 per barrel this past February. The drop crippled many U.S. oil producers and services companies, lowering U.S. output and setting the stage for prices to rise again.

Saudi Arabia is under increased pressure to act because the kingdom blew through more than $180 billion, about a quarter of its financial reserves, to maintain government spending as oil revenues plunged.