Less Saudi oil production may hurt US drivers.

Get Ready for Higher Gas Prices: Saudi Arabia Announces Oil Production Cuts

Gas prices in the United States are slated to rise as early as mid-week this week on the news of Saudi Arabia’s new oil production cuts announced this weekend.

The kingdom broke with other OPEC+ members Sunday in announcing an additional voluntary oil production cut of 1 million barrels per day in July, a 10% reduction intended to boost prices closer to its target of around $80 per barrel.

What This Means for Consumers

The cuts will reduce the kingdom’s output to just 9 million barrels per day (bpd) in July, amounting to its lowest production level in years. Saudi officials said the cut will likely last one month, but reserved the right to extend it beyond July, depending on oil market conditions. Saudi Energy Minister Prince Abdulaziz bin Salman defended the reduction as a “precautionary” measure aimed at stabilizing markets.

But the decision puts Saudi Arabia at growing odds with the Biden administration and others who have repeatedly urged OPEC+ to keep production steady, citing rising costs for consumers. It also comes in contrast to the policy of the United Arab Emirates, another OPEC+ member that said this weekend it would raise its output targets by 200,000 bpd, up to a total of 3.22 million bpd, beginning in 2024.

In the U.S., the oil supply cuts could translate to another painful spike in retail gasoline prices at the height of the summer driving season. Gas prices climbed last June to a record high of $5.02 per gallon, following Russia’s invasion of Ukraine and fears of a major drop in oil production. Though gas prices aren’t expected to rise as high as last summer, analysts said they could spike in the next few days following the news of Saudi Arabia’s planned cuts.

Why Oil Prices Matter

Crude oil factors heavily into U.S. gasoline prices, and accounted for 57% of final retail gas prices in 2022, according to the U.S. Energy Administration. “Last time OPEC+ agreed to cut production, it led to a temporary rally in the price of oil, but as global oil demand hasn’t been as strong as expected, the cut failed to hold oil prices up,” Patrick De Haan, the head of petroleum analytics at GasBuddy, said Monday in an interview with The Orange Leader, a Texas newspaper. “It’s likely that as a result of the production cut, oil prices could rally this week, pushing gasoline prices higher as early as mid-week,” De Haan added. AAA spokesman Andy Gross also cited low crude prices as the primary driver pushing gas prices down in the U.S. — conditions he said could quickly change, depending on oil prices.

What Analysts Are Saying

OPEC+ members collectively pump around 40% of the world’s crude. But with the new Saudi cuts, it will have taken some 4.6 million barrels per day of oil off of global markets in July — or the equivalent of 4.6% of global demand. Analysts had already expected global oil demand to outstrip supply in the second half of 2023. But they said Monday that the new output cuts could push Brent prices towards $100 per barrel by the end of the year. Rystad Energy said in a note that the new cuts are likely to deepen the existing oil market deficit to more than 3 million bpd in July. And the International Energy Agency predicted last month that global oil demand will increase to 102 million barrels per day in 2023, eclipsing supply by nearly 1.5 million bpd.

On Monday, the group’s executive director, Fatih Birol, said the chance of higher oil prices had “increased a lot” as a result of the new OPEC+ deal. Goldman Sachs analysts described the meeting as “moderately bullish,” noting the reductions could boost Brent prices by between $1 and $6 per barrel by the end of the year, depending on how long Saudi Arabia maintains its production cuts.

Stay tuned for updates on how these production cuts will impact gas prices in the coming weeks.