Implications of OPEC’s Unexpected Oil Cut on Gasoline Prices

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In recent news, OPEC and its allies have made a surprise move to slash oil production, and this will soon have an impact on US gas pumps. OPEC+ announced that they will be cutting oil production by over 1.6 million barrels a day starting in May and continuing until the end of the year. This news caused a significant increase in both Brent crude futures and WTI, the US benchmark, with prices up approximately 6% in trading on Monday.

However, the impact of this production cut will be felt much more quickly at gas pumps. Gasoline futures, which are closely watched, surged by about 8 cents a gallon, or roughly 3%, in morning trading. According to Tom Kloza, global head of energy analysis for OPIS, this move by OPEC is awakening the inflation monster and will have a major impact.

At present, the national average for US gas prices is $3.51, and Kloza predicts that it could rise to $3.80-$3.90 in a short period of time due to OPEC’s decision. While he doesn’t believe gas prices will reach $5 a gallon, he anticipates that they could surpass last year’s prices, especially if there are any natural disasters such as hurricanes that affect production along the Gulf Coast.

Last year, the average US regular gas price following Russia’s invasion of Ukraine was $4.19 a gallon, and it eventually reached a record high of $5.02 a gallon on June 14. However, prices then started to decline slowly but steadily over the following three months. This decline was partly due to the release of oil from the US Strategic Petroleum Reserve and concerns of a potential recession that could reduce the demand for gasoline.

Although gas prices are currently close to the average from February 23, 2022, Kloza explains that there are certain factors preventing them from reaching record levels again. The US plans to release more oil from the Strategic Petroleum Reserve, and both US oil production and refining capacity have increased. However, with OPEC+ cutting 1 million barrels a day, it won’t be easy to compensate for their decrease in production.

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