June 2nd 2024.
Over the weekend in Frankfurt, Germany, a decision was made by Saudi Arabia and other oil-producing nations to continue cutting their output through next year. This was done in an effort to support oil prices, which have remained stagnant despite the ongoing turmoil in the Middle East and the start of the summer travel season.
The group responsible for this decision is known as OPEC+, which includes members of the producers cartel and allied countries like Russia. In total, they have agreed to cut a total of 5.8 million barrels of oil per day. This move comes as international benchmark Brent has been hovering around $81-$83 per barrel for the past month.
Even with recent events such as the conflict in Gaza and attacks on shipping in the Red Sea, oil prices have not reached the levels seen in September 2022, when they hit $100 per barrel. This can be attributed to various factors, such as higher interest rates, concerns about demand due to slower economic growth in Europe and China, and the increase in non-OPEC supply from U.S. shale producers.
However, for countries like Saudi Arabia and Russia, higher oil prices are crucial to fund their respective plans for economic diversification and stability. This is especially important for Saudi Arabia, as they work towards reducing their dependence on fossil fuel exports.
While analysts believe that the output cuts could lead to an increase in oil prices in the coming months, much will depend on the demand for oil going forward. The summer months typically see a rise in demand, but there is uncertainty about how this will continue into the later months of the year.
On a positive note, consumers in the United States have been benefiting from lower oil prices, with gasoline prices remaining relatively stable at $3.56 per gallon last week. This is a penny less than the same time last year and a significant drop from the record high of $5 per gallon in June 2022. However, prices can vary by region, and states in the West have been paying more, with California averaging $5.05 per gallon.
Unlike in the U.S., where the price of oil makes up half of the cost of a gallon of gasoline, the price swings in Europe are much smaller due to taxes making up a larger proportion of the overall fuel price.
To break down the specifics of the extended cuts, 2 billion barrels a day have been agreed upon by all 23 OPEC+ members and will continue through the end of 2025. Additionally, a voluntary reduction of 1.65 million barrels a day by a smaller group of members has also been extended until the end of 2025, according to a report by the official Saudi Press Agency. Finally, another 2.2 million barrels a day in voluntary cuts, which were set to expire at the end of this month, will now be gradually reduced month by month until they are completely eliminated by September 2025.
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