Implications of OPEC’s Unexpected Oil Reduction on Gasoline Prices
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In recent news, OPEC and its allies have announced a surprise move to slash oil production. This decision will soon have an impact on US gas pumps. Starting in May, OPEC+ will cut oil production by more than 1.6 million barrels a day until the end of the year. As a result, both Brent crude futures and WTI, the US benchmark, have seen an increase of about 6% in trading on Monday.
While the spike in oil prices may take time to affect consumers, the announcement has already had an immediate impact on gasoline futures. US drivers can expect to see an increase in gas prices, as wholesale gasoline prices have already risen by about 8 cents a gallon, or about 3%, in morning trading.
Tom Kloza, global head of energy analysis for OPIS, believes that OPEC’s decision is reawakening the inflation monster. He also suggests that the White House will be shocked and majorly concerned about this development. Kloza anticipates that US gas prices could reach $3.80 to $3.90 in the near future due to the move by OPEC.
Although Kloza does not believe that gas prices will reach $5 a gallon, he does expect prices to surpass year-earlier prices by the end of the summer. External factors such as hurricanes or other storms affecting production along the Gulf Coast could further contribute to the increase.
It is important to note that the average US regular gas price was $4.19 a gallon a year ago, following Russia’s invasion of Ukraine. Prices eventually peaked at a record $5.02 a gallon on June 14. While US gas prices currently stand at $3.51, just below the average on Feb. 23, 2022, additional releases from the US Strategic Petroleum Reserve and increased US oil production and refining capacity have helped to keep prices lower than the record levels of 2022.
Despite the mitigating factors, a cut of 1 million barrels a day of oil by OPEC+ will not be easily compensated. Kloza believes that OPEC+ has the ability and motivation to cut production, which will have lasting effects on global oil prices.
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