Updated Oct 5, 2022 - Energy & Environment

What OPEC's 2 million-barrel cut could mean for U.S. gas prices

Illustration of a tiny oil barrel held between a person's fingers.

Illustration: Aïda Amer/Axios

OPEC+ is jolting oil markets this week with plans to cut output — and the ripples could reach all the way to the U.S. midterm elections.

Driving the news: The coalition of OPEC, Russia and allied producers on Wednesday announced cuts of 2 million barrels per day in Vienna starting in November 2022.

  • It's looking to prop up prices that have fallen greatly since early June when Brent crude was above $120 per barrel — and has already succeeded despite bearish economic signs.
  • Word of the cuts in the tight global market sent oil prices back upward this week, with Brent crude rising several dollars to roughly $93 Wednesday morning.

Why it matters: The crude revival — if it persists — will put fresh upward pressure on U.S. gasoline prices, which have already inched back up lately after months of big declines.

  • The ongoing Saudi-Russian cooperation despite Vladimir Putin's invasion of Ukraine is also the latest sign of Riyadh's strained relations with the White House.

Threat level: U.S. officials "are reportedly working around the clock to stave off a big cut, appealing to countries that it maintains strong defense and strategic ties," RBC Capital Markets said in a note. (CNN has more.)

What they're saying: "The President is disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine," National Security Advisor Jake Sullivan and National Economic Council director Brian Deese said in a statement.

  • "At a time when maintaining a global supply of energy is of paramount importance, this decision will have the most negative impact on lower- and middle-income countries that are already reeling from elevated energy prices," they added.
  • The Department of Energy will deliver another 10 million barrels into the market next month through the Strategic Petroleum Reserve, they said.

The big picture: Rice University's Jim Krane tells Axios the likely cuts reflect the persistence of Saudi-Russia market cooperation that began a half-decade ago in response to the rise of U.S. shale production.

  • "Putin has been able to insert himself in what was a pretty strong relationship between the U.S. and Saudi Arabia, and he's destabilizing that relationship right now," said Krane, a fellow with the school's Baker Institute for Public Policy.

The intrigue: The White House had been aggressively touting the pump price relief for weeks, but a reversal could revive political jeopardy in the upcoming election.

  • “Higher prices are bad news for Democrats,” ClearView Energy Partners' Kevin Book tells Bloomberg.

What we're watching: How the market responds after the announcement.

  • Oil analyst Ellen Wald's latest column notes more price increases are "likely to be tempered" by concerns that a global recession will hurt demand.
  • GasBuddy analyst Patrick De Haan tells Axios the U.S. gasoline price trajectory will differ regionally, with prices in the Gulf Coast, Southeast, Northeast and East Coast set to rise.
  • But recent refinery problems and maintenance in the Great Lakes area and West Coast have already bolstered prices there.
  • "Once those issues are addressed, the decreases will likely overpower oil prices rising," De Haan said, but notes the OPEC+ cut means the amount they decline again will be smaller.

Meanwhile, the U.S. has limited options to respond to the OPEC+ cut.

  • The White House is already deep into a historically large Strategic Petroleum Reserve release.
  • Production growth, meanwhile, has stalled for now despite attractive prices as companies deal with a mix of supply chain and labor challenges, investor pressure for discipline and more.

Yes, but: "Tighter crude oil markets ... could give the White House further impetus to consider limitations on refined products exports as a brake on rising pump prices," ClearView Energy Partners said in a note Wednesday morning.

Editor's note: This story has been updated with a statement from the White House and details of OPEC's planned production cuts.

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