How will OPEC+ oil cut impact US gas prices? Experts weigh in

The alliance agreed to cut oil output by 1.2 million barrels per day.

April 3, 2023, 2:28 PM

A group of oil-producing nations imposed a significant cut in oil output with far-reaching consequences for U.S. gas prices, industry analysts told ABC News.

The alliance of countries known as OPEC+, led by Saudi Arabia and Russia, agreed on Sunday to cut oil output by 1.2 million barrels per day starting in May, which amounts to removing roughly 1% of oil from the global market.

Regardless of the production cut, prices typically rise in the summer due to a spike in demand as car owners take road trips and families fly to vacation destinations.

The OPEC+ output decision, however, will send gas prices as much as 30 cents higher per gallon than they would have spiked otherwise, the analysts said.

"I certainly think there's going to be upward pressure on prices as a result of these production cuts," Patrick de Haan, the head of petroleum analysis at GasBuddy, told ABC News.

The announcement from OPEC+ met disapproval from the Biden administration.

"We don't think that production cuts are advisable at this moment, given market uncertainty, and we've made that clear," White House Spokesman John Kirby said on Monday.

The production cut coincides with an ongoing rise in gas prices. The national average price for a gallon of gas stands at $3.50, which marks a 2% increase over the past week and 3% spike over the past month, AAA data showed.

In California, the state with the highest gas prices, the average price per gallon is $4.83, according to AAA.

Average gas prices nationwide remain nearly 20% lower than where they stood a year ago.

PHOTO: Prices are displayed at a Mobil gas station in West Hollywood, Calif., March 8, 2022.
Prices are displayed at a Mobil gas station in West Hollywood, Calif., March 8, 2022.
Jae C. Hong/AP, FILE

Despite the anticipated rise in gas prices as a result of the OPEC+ production cut, analysts do not expect gas prices to reach the eye-popping levels on display last summer.

"People are waving their hands and feel like their hair is on fire: What does this mean for the U.S. consumer?" Peter McNally, a global sector leader for industrial materials and energy at Third Bridge, told ABC News about the production cut.

"Year over year, we're still looking at lower prices," he added.

McNally said he expects U.S. gas prices to rise between 20 and 30 cents in additional cost as a direct result of the production cut; while de Haan, of GasBuddy, said he anticipates a more modest increase of between 5 and 15 cents.

The OPEC+ production cut announced on Sunday follows a previous cut in October that saw the group of oil-producing countries slash output by 2 million barrels per day.

The latest production cut will prove more impactful because it coincides with heightened demand in the summer season, as opposed to the previous cut that took place during the annual drop in gas prices that occurs in the fall, McNally said.

To be sure, the exact price implications of the Sunday announcement remain murky, analysts said.

As the financial system teeters and the Federal Reserve raises interest rates, a possible global economic slowdown could weaken oil demand and limit the upward effect on gas prices, some analysts said.

In fact, indicators of a coming recession likely contributed to the recent decision from OPEC+, since the group wants to avoid a potential oversupply of oil that could accompany a downturn, Timothy Fitzgerald, a professor of business economics at Texas Tech University, told ABC News.

"They're making what may effectively be a preemptive cut anticipating weaker economic conditions coming during the rest of this calendar year and trying to balance their production with what they perceive the demand will be," Fitzgerald said.

However, potential decline in oil consumption from a recession could be more than offset by a bounce back in Chinese economic activity, McNally said, noting that the country consumed 200 million fewer barrels than expected last year amid coronavirus lockdowns.

"The big wildcard is China," McNally said. "If China does finally come out of this COVID funk, it'll use an awful lot of oil."

Related Topics