Energy Market Uncertainty after the Oil Exporting Countries Decision to Cut Offshore Production and Reduce U.S. Gasoline and Oil Prices
There are sources of uncertainty. On Sunday, the Organization of the Oil Exporting Countries decided to maintain their existing plan for a reduction in production equivalent to 2% of global demand. If the group opts to place even harsher limits on output, that could drive up prices again.
The futures of gasoline and oil had fallen since mid-June as concerns about a possible recession caused demand for gas to fall.
The price increases have been gradual for most of the time, but that may soon change. Russia and other major oil producers decided to cut their production by 2 million barrels a day on Wednesday.
The decision to cut supply sent crude oil higher and flirting with $100 a barrel. The global benchmark was just below $93 on Thursday, up about 11 percent from the recent low.
The average price of a gallon of regular gasoline has declined to $3.80 from just over $5 on June 14, according to the AAA auto club, although it has climbed a bit in recent days.
Russia’s war in Ukraine also continues to hang over the energy market, as does President Vladimir Putin’s response to Europe’s oil embargo and the new price cap. It could also lift prices if Russia decides to cut production by a million barrels per day.
gasoline futures were slightly higher and oil futures were up 2% on the news. Gasoline futures are up about 20 cents a gallon since the slide in gasoline prices ended last month, pointing to possible higher prices ahead.
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 that 18% of the nation’s refining capacity is offline.
He said that it was put off because they were making so much money. “The margin of error in US refining capacity is so slim right now that you can’t lose any capacity without affecting prices.”
Regulations that require cleaner gas to fight smog come to an end in most of the country this time of year, which is why gas prices usually go down. The end of the summer driving season also reduces demand, which in turn pushes prices downward.
Unfortunately, the refinery capacity squeeze “means gas prices are not going to go down like I had thought,” said veteran oil analyst Andy Lipow. “In fact, they might drift upwards.”
One other factor that helped to reduce prices in recent months: the release of about 1 million barrels of oil a day from the nation’s Strategic Petroleum Reserve, which is set to end November 1.
The decline in gasoline prices has been an important control on rising overall prices, as well as a support for consumer spending, as it means more money goes in consumers’ pockets.
Members of the Biden administration pushed hard to convince Iran not to cut production and send prices higher. Those efforts weren’t successful.
“With unrelenting inflationary pressures and interest rate hikes taking their toll, higher oil prices may prove the tipping point for a global economy already on the brink of recession,” the Paris-based agency said Thursday in its monthly oil market report.
The IEA cut its forecast for world oil demand growth next year, due to downgrades to global growth expectations. The International Monetary Fund said this week that for many people 2023 will “feel like a recession,” as it cut its GDP growth forecast to 2.7% from an earlier prediction of 3.2%.
Despite much weaker growth in demand, the supply cuts by Saudi Arabia and other major oil producers are expected to sharply reduce global oil stocks and keep prices elevated.
US President Joe Biden told Jake Tapper on CNN that the United States must rethink its relationship with Saudi Arabia, in light of the recent cut in Riyadh’s oil support.
Saudi Minister of State for Foreign Affairs said the cut was intended to stabilizing 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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“This casts doubt on suggestions that higher prices will necessarily balance the market through additional supply,” it added. Supply growth is set to “slow markedly” in 2023, although still reach a record of 100.6 million barrels a day. World oil demand is forecast to average 101.3 million barrels a day next year, the IEA said.
“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.
Both Brent crude futures, the global benchmark, and West Texas Intermediate futures, the go-to for US prices, have dropped almost 10% so far this week, hitting their lowest levels of the year.
Plus, demand from China could rebound faster than expected as the country lifts coronavirus restrictions. The economic impact of those restrictions has been a factor in the recent drop in oil prices.