Opec+ to Slash Output by 1 Million Barrel Per Day; US Gasoline Prices to Climb Back to $% a Gallon

Oil prices rose sharply on Monday after reports said the OPEC+ alliance is planning to cut production by more than 1 million barrels a day to prevent prices from falling.

Brent crude futures rose by $2.82, or 3.3 percent, to $87.96 a barrel, while the US West Texas Intermediate crude was rose by $2.60, or at $82.09 per barrel.

This marks the break from several months of price decline, and signals the possibility of US gasoline prices hitting $5 a gallon once again.

gas prices in the US
gas prices in the US pixabay

Turning the Tide

China's zero-Covid policy and continued lockdowns, coupled with the recession fears generated by runaway inflation and central bank action across the world, had depressed oil markets for several months now. This prompted major oil producers to turn the tide in their favor by reducing production levels.

A key meeting of the Organization of the Petroleum Exporting Countries and their allies (Opec+) is coming up on Wednesday. The cartel is likely to announce an output cut of up to 1 million barrels of oil a day at the meeting, Reuters reported, citing sources.

"Anything less than 500kb/d would be shrugged off by the market. Therefore, we see a significant chance of a cut as large as 1mb/d," analysts at ANZ wrote in a note.

Opec Memebers' Budget

Bloomberg reported earlier this week that leading oil producer Saudi Arabia is laying out its budget on expectations that Brent crude prices to be around $76 a barrel next year.

The latest move by the oil cartel reveals concerns that a downward spiral in prices could potentially impact its members' budgets next year.

Crude oil prices
Crude oil prices Flickr

"It is interesting that OPEC+ is considering a production cut already when Brent has hardly touched below $85 a barrel ... Most of the OPEC+ players, including Russia, are producing below its production due to capacity constraints. Hence, the majority of the group will feel no pain by supporting a production cut," said Helge Andre Martinsen, senior oil analyst at DNB Bank ASA, according to Bloomberg News.

If the cartel firms up prices, the chances of US average gasoline prices hitting $5 again are strong, analysts estimate. If crude returns to the $100 per barrel levels the US consumers will not be spared the pain at the pumps, says Oilprice.com.

Russia Influence

It will be interesting to see how the US and the big European energy consuming nations respond to the pressure tactic of the Opec+ cartel, where Russia is wielding an outsize influence. For the Joe Biden administration in the US, high gasoline prices in the near term are detrimental as the Democrats are facing a tough mid-term elections in November. For Biden, a strong showing in the elections is the only way to retain control of Congress and regain Senate.

By last week, the US national average gas price had fallen to $3.68 per gallon, which was way below the $5 per gallon mark that was breached in early June. Gasoline prices had spiked on the back of supply fears in the aftermath of Russia's Ukraine war, which started in February, sending panic waves among the US consumers.

The AAA had warned last week that gasoline prices have ended the declining streak that lasted for nearly 100 days. The Opec+ production cut, which if it happens will be the steepest after the pandemic, will seriously impact the US pump prices.