Oil surges to 1 1/2-year high, Fed rate increase looms

Oil surges to 1 1/2-year high, Fed rate increase looms

Read More: Collins World News

A gas station attendant pumps fuel into a customer's car at PetroChina's petrol station in Beijing, China

Oil prices surged to their highest since mid-2015 and U.S. Treasury yields hit a more than two-year peak on Monday after the world's TOP crude producers agreed to cut output.



Coming at the start of a week when the United States is expected to raise interest rates for the only the second time since the global financial crisis, the weekend agreement between Organisation of Petroleum Exporting Countries and key non-OPEC states set the markets alive.



Brent oil futures soared more than 5 percent to top $57 a barrel for the first time since July 2015 and U.S. crude leaped above $54 a barrel to send global inflation gauges spiking as well [GVD/EUR]



There was a particular surprise as Saudi Arabia, the world's number one producer, said it may cut its output even more than it had first suggested at an OPEC meeting just over a week ago.



"The original OPEC deal pointed to a fairly lumpy 3 percent cut (in production), so this suggests there is a bit more upside for oil prices," said Neil Williams, chief economist at fund manager Hermes.



On the rise in bond yields, which tend to set global borrowing costs, he added: "The Fed hike is mostly baked in so when we do get it, it will be more about the statement."



European oil companies jumped more than 2 percent on the oil surge and helped the pan-regional STOXX50 index add 0.2 percent, having just had its best week in exactly five years [.EU].



Bond markets, in contrast, were under heavy pressure. Euro zone government bond yields opened sharply higher with German Bunds up 5 basis points at 0.40 percent as U.S. yields TOPPED 2.5 percent for the first time since October 2014.



"We have seen OPEC and non-OPEC producers agreeing, which is boosting reflation expectations around the world," said Chris Weston, an institutional DEALER with IG Markets.



In another sign of the reflation trade, breakeven rates --the gap between yields on five-year U.S. debt and a matching tenor in inflation-protected securities-- were at two-month highs.



FED UP



Focus was also on the CURRENCY MARKETS as the dollar rose to its highest since February against the Japanese yen, before what is almost certain to be the first rate hike of the year from the U.S. Federal Reserve on Wednesday. [FRX/]



Japan's yen also tends to suffer when oil prices rise, since the country is a major IMPORTER.



The Norwegian crown, Canadian dollar, and Russia rouble were the big gainers from the oil deal. The rouble rose almost 2 percent against both the dollar and euro.





Overnight in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.5 percent after posting its biggest weekly rise in nearly three months last week.