Saudi oil cut could lead to long-term gas hike if demand climbs

The government of Saudi Arabia announced Sunday that it will voluntarily cut oil production by about 1 million barrels a day, likely sending gas prices higher this summer in the U.S.

The Gulf kingdom, the largest oil producer in the Organization of Petroleum Exporting Countries, confirmed that it will cut production from 10 million to 9 million barrels despite OPEC at large announcing it will not alter production plans for the remainder of 2023.

Patrick De Haan, head of petroleum analysis at GasBuddy, noted that oil prices shot up Sunday night when markets opened to around $75 a barrel, but they had dropped to $72 as of Monday morning. In the immediate short term, De Haan said, the impact on U.S. consumers will likely be measured in cents, with the national average possibly climbing over the next week or two.

“It appears that the market was really worked up yesterday but things are cooling off today, [so] there may not even be a three-to-six cent impact,” he said. “It’s going to be a very minor impact at the pump this week.”

However, De Haan noted, one major reason gas prices are so much lower compared to last year is concern about a potential economic slowdown, compounded in recent weeks by factors like uncertainty about the federal debt ceiling and a string of bank failures.

“The concern, though, is that as time progresses, going into 2024, the state of the U.S. economy is a big wild card,” he said. “The long term [view] is that if the economy starts heating back up at the same time production of oil is going down, that intersection point could be problematic, and who knows if that could occur this year or next year.”

Additionally, he said, the U.S. withdrew significant supply from the strategic petroleum reserve when gas prices spiked last year.

“If demand starts to accelerate, we could see the market become concerned with the lack of supply in the market,” he said, adding that if there are more drastic impacts from the Saudi production cuts, they are more likely to become evident around August or September.

Last year as prices spiked, President Biden met with Saudi Crown Prince Mohammed bin Salman, drawing criticism from human rights advocates due to his role in the killing of Washington Post columnist Jamal Khashoggi. More recently, a subset of oil producers led by the Saudis announced a million-barrel cut for the month of May in April.