Implications of OPEC’s Unanticipated Oil Cut on Gas Prices
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In recent news, OPEC and its allies have made a surprising move to slash oil production, and this decision will soon have an impact on US gas pumps. The group, known as OPEC+, announced that they will be reducing oil production by over 1.6 million barrels a day starting in May and continuing until the end of the year. This news has caused both Brent crude futures and WTI, the US benchmark, to increase by about 6% in trading.
The effects of this production cut will also be felt in gasoline futures, which will translate to higher prices for US drivers much faster than the increase in oil prices. RBOB, the most closely watched wholesale gasoline price, has already risen by about 8 cents per gallon, or approximately 3%, in morning trading.
“I think OPEC is reawakening the inflation monster,” says Tom Kloza, global head of energy analysis for OPIS. He believes that the White House must be shocked by this decision, and it will definitely have a significant impact. This move by OPEC will change the calculations for a while.
Currently, the national average for US gas prices is $3.51, according to AAA. However, Kloza predicts that it could rise to $3.80 to $3.90 in a relatively short amount of time due to OPEC’s decision. While he doesn’t believe that prices will reach $5 per gallon, he says that US drivers could see prices above year-earlier levels by the end of the summer, especially if there are any hurricanes or storms affecting production along the Gulf Coast.
It is important to note that US gas prices were hovering around $4.19 a gallon a year ago, following Russia’s invasion of Ukraine. The subsequent disruption to the world’s energy markets caused prices to eventually peak at a record $5.02 per gallon on June 14. However, prices gradually declined over the next few months, mainly due to the release of oil from the US Strategic Petroleum Reserve and concerns over a potential recession.
Despite the current price of $3.51, which is just below the average on Feb. 23, 2022, the day before Russia’s invasion of Ukraine, Kloza believes that prices won’t reach the record levels of 2022. While additional releases from the SPR and increased US oil production and refining capacity will prevent a significant spike, the 1 million barrel per day cut by OPEC+ will still have an impact.
“They have the ability to cut production and they seem motivated to do so,” says Kloza. This decision by OPEC+ will undoubtedly have consequences for US gas prices, and it will be interesting to see how the situation unfolds in the coming months.