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OPEC+ said Wednesday that it will slash oil production by 2 million barrels per day, the biggest cut since the start of the pandemic, in a move that threatens to push gasoline prices higher just weeks before US midterm elections.
The surge in global oil prices in the first half of the year has dissipated on fears that a global recession will affect demand. Since the end of June, the price of crude has gone down. The global benchmark hit a peak of $139 a barrel in March after Russia’s invasion of Ukraine.
The group already lags behind its stated production ceiling and a cut in volume is unlikely to be fully implemented by all countries, according to an analyst.
There will be cheaper gas prices next year. The national average could go back to $4 a gallon as early as May, according to projections shared exclusively with CNN by GasBuddy.
Those prices are under pressure not only by a slowing economy but also by increased oil production in the United States, Guyana, Brazil and other countries. Kuwait is one of the countries that is investing to expand their production capacity.
In a statement on Wednesday, the Biden administration said that the decision of the organization would hurt low and middle-income countries the most.
At the gas pump, Americans have been affected by the price of gas in the US and the sanctions imposed on Russia.
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The prospect of a production cut was framed as a “total disaster” in draft talking points circulated by the White House to the Treasury Department on Monday, which CNN obtained. “It’s important everyone is aware of just how high the stakes are,” one US official said.
The price of gas went up to $5.03 a gallon in June. Things changed after the Russian invasion of Ukraine.
The agency said in its report that higher oil prices could prove to be the tipping point for the global economy as inflationary pressures and rate hikes take their toll.
Rystad Energy estimates that the global oil market will be oversupplied between now and the end of the year, dampening the effect of production cuts on prices.
The nation’s Strategic Petroleum Reserve, which holds 1 million barrels of oil a day, will end in November, which has helped to reduce prices in recent months.
Oil futures rose about 2% on the news and gasoline futures were also slightly higher on the OPEC move. Gasoline futures are up about 20 cents a gallon since the slide in gasoline prices ended last month, pointing to possible higher prices ahead.
Both of the world’s main crude futures have been dropping this week and are currently at their lowest levels of the year.
The recent increases have been caused by the unusually high number of US refineries that are shut down for maintenance work, said Tom Kloza, global head of energy analysis for OPIS, which tracks gasoline prices for AAA. He said nearly 18% of the nation’s refining capacity is now offline.
“A lot of it was put off in spring because they were making so much money,” he said. The margins of error in US refining capacity are so small that you can’t lose any capacity without affecting prices.
The refinery capacity squeeze means that gas prices will not go down like I had thought, said veteran oil analyst Andy Lipow. “In fact, they might drift upwards.”
The consumer’s confidence was battered because of the swings in oil and gasoline prices. The swings were felt in different ways across the nation. The scarcity of refining capacity resulted in higher gas prices in western states. There were a number of refinery accidents throughout the year, causing spikes in other regions as well. Everyone saw prices change frequently, but not always at the same time.
The International Energy Agency slashed its forecast for world oil demand next year by more than 20% due to slower growth expectations from major institutions. The International Monetary Fund said this week that it is cutting its GDP growth prediction for the year because people will feel like a recession.
It is a tricky time for a potential drop in oil supply. China’s swift reopening of its economy in December after almost three years of strict coronavirus restrictions has pushed up estimates for global oil demand.
The decision by the cartel to slash oil production by 2 million barrels a day, equivalent to about 2% of global oil demand, has placed Saudi Arabia on a collision course with the White House, which has accused the kingdom of aligning with OPEC+ member Russia.
Saudi Minister of State for Foreign Affairs stated that the cut was intended to stabilization of markets. “We’re trying to make sure we don’t have erratic swings in prices,” al-Jubeir, one of Saudi Arabia’s top diplomats, told CNN’s Becky Anderson on Wednesday.
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Another factor playing into underinvestment is the oil bust in 2020. The early days of the pandemic drove Brent crude as low as $20 a barrel — while US oil prices briefly turned negative — leading to a spate of bankruptcies across the oil and gas industry.
It cast doubt on suggestions that higher prices will balance the market through additional supply. Although still reach arecord of 100.6 million barrels a day, supply growth is currently set to slow significantly in the year 2023. The IEA said world oil demand will average 101.3 million barrels a day next year.
“Gasoline deflation is alive and well,” Patrick De Haan, head of petroleum analysis at GasBuddy, tweeted on Wednesday, noting the quick comedown in gas prices in California, where prices have been particularly steep.
China could rebound more quickly than expected when the coronavirus restrictions are lifted. The economic impact of those restrictions has been a factor that has contributed to the drop in oil prices.
That cooldown could prove significant, translating to families spending an average of $277 less on fuel for the year. If that’s true, US gasoline spending will go down by an estimated $55 billion.
“2023 is not going to be a cakewalk for motorists. It could be expensive,” Patrick De Haan, head of petroleum analysis at GasBuddy, told CNN. The national average could break through $4 a gallon early in May, and it could last through much of the summer driving season.
Beyond the war, energy markets were rocked by a range of major forces, including China’s Covid-19 lockdowns, recession fears, super-sized interest rate hikes from the Federal Reserve and the White House’s unprecedented use of the Strategic Petroleum Reserve.
De Haan described the ups and downs in energy markets. “Extreme amounts of volatility. This year saw a lot of volatility and I think we have never seen that before.
Prices for the next 12 months will be driven by developments in the war, the Federal Reserve’s fight against inflation, OPEC policy, China’s Covid restrictions, a potential economic recession and perhaps other forces that are not even known at this point.
Some of the factors that have led to the plunge to 18-month lows include the return of refinery to earlier this year, recession fears, and record-setting releases of emergency oil by the Biden administration.
There wasn’t the same level of relief when it came to diesel. Diesel prices peaked in June and fell only half as much as gasoline. And while gasoline is cheaper than it was a year ago, diesel remains close to the pre-2022 record price set in 2008. Diesel prices were high due to increased demand from Europe in the wake of the war in Ukraine.
There is also the wide variation in gas taxes, from 68 cents a gallon in California to only 15 cents a gallon in Alaska. Some states temporarily halted their state gas taxes during the year in the face of high prices.
Drivers in the low income states had to work longer to buy gas than drivers in the high income states because of the difference in average income.
In Mississippi, which has an average hourly wage of $23.52, it took one hour and 41 minutes of work to pay for 15 gallons at 2.70 a gallon at the end of the year. In California, where the average price of regular was $4.38 a gallon, or about 60% more than in Mississippi, the average hourly wage of $37.61 meant that they only had to work four more minutes to buy those 15 gallons.
Russia’s crude oil price cut after the first world oil-rich bloc voted to end its seaborne oil export restrictions by a billion barrels per day
Russia will cut crude oil production by half a million barrels per day in March after the world’s major economies imposed a price cap on the country’s seaborne exports.
Russian Urals crude traded at a discount to Brent crude of $28 a barrel Friday morning. Over the past few months, India and China have bought cheap oil from Moscow, just as the EU has ended all imports.
That peak was short-lived — the national average price of gasoline, as tracked by the agency Oil Price Information Service for AAA, fell continually for 98 straight days from the day the record was set to September 20.
The market reaction was due to uncertainty, according to analyst Andy Lipow. He said that those trading oil futures thought the world market would need to find a replacement for all of Russia’s oil.
In addition, the United States and its allies announced in March they would start releasing oil from their stockpiles of crude, such as the US Strategic Petroleum Reserve, putting downward pressure on prices.