The price of crude shot up more than nine per cent Wednesday to settle near US$50 a barrel after OPEC, the world's largest oil cartel, agreed to trim production for the first time in eight years.
The deal sent the January contract for West Texas Intermediate crude higher by $4.21 to US$49.44 per barrel amid optimism that a smaller global supply will help drive up oil prices. The last time a barrel was priced above the US$50 mark was on Oct. 24, when it closed at US$50.52.
The Organization of the Petroleum Exporting Countries says its 14-member group will collectively scale back a total of 1.2 million barrels to a daily output of 32.5 million a day starting in the new year. The cartel produces a third of the world's oil.
Non-OPEC nations, including Russia, were expected to also pare an additional 600,000 barrels a day off their production.
The agreement came as a surprise to stock markets, which had been fraught with worry over the past few weeks that the historically disagreeable group would not be able to reach a consensus with all its members. Crude prices had sunk four per cent on Tuesday as the markets bet that no deal would materialize.
But as with other major global decisions this year, like the British exit from the European Union and the victory of U.S. president-elect Donald Trump, the markets had gotten it wrong.
"Historically, the old adage is that the market is always predicting, the market is always looking ahead six months, the market is always right. But here's a third major deal that the market got completely wrong," said Michael Currie, a vice president and investment adviser at TD Wealth.
He noted markets couldn't really be blamed for the wrong call because the history has shown that OPEC often cannot agree due to a rivalry between Saudi Arabia and Iran.
The Saudis have long been hesitant to shoulder the lion's share of a cut, while Iran had resisted reducing its own production, arguing that it has yet to recover its output levels hit by years of sanctions.
Currie said this deal shows that OPEC is desperate to bring the price of oil higher. Crude prices have fallen sharply since mid-2014, when it was over US$100 a barrel, dropping below US$30 at the start of this year.
It also shows that the cartel still has clout.
"There's been a lot of talk about OPEC being dead, OPEC being meaningless, OPEC no longer a player in the global market because they couldn't get along and agree to their own [output] numbers," Currie said.
"We know all these countries want the price of oil to get higher and, as we've seen today, they have the power to do it."
The optimism drove the commodity-heavy S&P/TSX composite index in Toronto up 83.04 points at 15,082.85, with the energy sector recording the largest rise, surging by nearly eight per cent.
Oil prices also helped the Canadian dollar, which added 0.05 of a U.S. cent to 74.47 cents US.
In New York, the Dow Jones industrial average was relatively flat, up 1.98 points to 19,123.58, while the S&P 500 lost 5.85 points to 2,198.81. The Nasdaq composite fell 56.24 points to 5,323.68.
Other commodities were mixed with the February gold contract falling $16.90 to US$1,173.90 an ounce, January natural gas jumping four cents at US$3.35 per mmBTU, and March copper contracts up two cents at US$2.63 a pound.
With files from The Associated Press.