After weeks of speculation and rumor, OPEC has announced that its members, along with some non-OPEC (NOPEC) members, have agreed to extend oil production cuts for another nine months.
The extension is hardly a surprise, given the damage inflicted on OPEC producers as a result of a high-stakes poker game it started in 2014 when Saudi Arabia announced it was “opening the spigots” and oil prices promptly plunged, bottoming out near $25 per barrel in February of last year. Last November, OPEC announced the cuts at its annual meeting, an about-face after two years of previously ignoring its quotas.
The extension of production cuts had been expected for months but doesn’t represent a threat to gasoline prices, thanks to U.S. oil producers that have filled some of the void left by cutbacks from OPEC and some non-OPEC producers. Surprisingly, oil markets reacted to the news by selling off, with West Texas Intermediate crude oil down $1.80 per barrel, back under $50 per barrel just days after breaking through the psychologically important barrier.
Oil prices for months have been range-bound between $45 to $55 per barrel, thanks to dominant forces on both sides. Essentially, what has been taking place with oil is a tug of war- should oil prices drop too low, market forces would kick in (producers would slow output), which would lead prices to rebound. If oil prices were to rise over $55 per barrel, producers would likely begin to ramp up production or cheat on established quotas.
Another elephant in the room to keep in mind is that hurricane season starts in one week. While we haven’t seen major influence in recent years from storms, the market could swing wildly should a hurricane head for the Gulf of Mexico. These weather events are impossible to predict, but many remember the damage inflicted by Hurricane Katrina in 2005, which resulted in catastrophic losses and shutdowns to oil production and refining operations.
So what’s the bottom line for U.S. motorists? Continue to watch OPEC closely. In light of the current strategy to better match production to demand, a change to either of those could upend the agreement, and with summer driving season just around the corner, any negative impact to production could show up in what motorists pay. Pay attention to hurricane season as well- especially for motorists in the South and East Coast, where such weather events could result in impacts to gas prices or infrastructure.