As oil prices stagnate, OPEC Plus opts to extend production cuts

Aug 31, 2023

With gas prices stagnant and oil markets relatively flat, the coalition of oil-producing nations led by Saudi Arabia and Russia on Sunday opted to extend cuts to oil production through 2024.

For American drivers, the move is unlikely to cause any significant swing in prices at the pump, which have remained steady despite the spike in travel over Memorial Day weekend and the usual uptick in driving anticipated for the summer. The prices — which averaged $3.55 per gallon nationally on Sunday, according to AAA — reflect global economic anxieties that are tamping down fuel demand.

The decision to hold down oil production came at a meeting in Vienna of the Organization of the Petroleum Exporting Countries and its partners, called OPEC Plus. In a news release, OPEC said the move sought "to provide long-term guidance for the market" and described it as "in line with the successful approach of being … proactive, and preemptive."

It followed the group's surprise decision two months ago to cut production by 1 million barrels per day.

At the time, some analysts said the reduction threatened to send prices at the pump jolting upward and the cost of a barrel of oil past $100. But oil prices continued to drop, with the price of Brent crude hovering at $76 over the weekend. The cost of a gallon of regular unleaded gas is a few cents lower than it was a month ago, and $1.27 cheaper than it was this time last year, according to AAA.

"Macroeconomic head winds are putting significant downward pressure on oil markets in recent weeks, despite the voluntary cuts" that OPEC Plus made earlier, said an email from Jorge León, senior vice president of oil market research at Rystad Energy.

That is forcing the group to tread carefully. Cutting output, León said, could ultimately create more challenges for the consortium.

"High oil prices would fuel inflation in the West right when central banks are starting to see inflation gradually recede," he wrote. "This could prompt central banks to continue increasing interest rates, a detrimental move for the global economy and oil demand."

The decision Sunday comes amid some tension inside OPEC Plus. While Saudi Arabia, the dominant member, sought cuts to production in the hope of pushing the cost of a barrel of Brent past $80, smaller countries such as the United Arab Emirates have been eager to boost production, according to a research note from Capital Economics.

Saudi Arabia announced at the close of the gathering it would unilaterally cut production by 1 million barrels a day to support oil prices, according to media covering the meeting. That news pushed up oil futures Sunday, with Brent crude rising more than 2 percent.

It is also unclear whether Russia has even complied with the earlier cuts OPEC Plus announced this year, the firm noted. Oil tanker tracking data suggests Russia is flouting those agreements, according to Capital Economics.