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What OPEC’s 2 million barrel cut could mean for US gas prices

OPEC+ is rocking oil markets this week with plans to cut production — and the volatility could extend to the U.S. midterm elections.

Prompting the news: OPEC, Russia and a coalition of related producers announced in Vienna on Wednesday that they will cut output by 2 million barrels a day from November 2022.

  • It wants to support prices, which have fallen sharply since early June when Brent crude was above $120 a barrel – and has already succeeded despite bearish economic signs.
  • Word of cuts in a tight global market lifted oil prices this week, with Brent crude up several dollars to around $93 on Wednesday morning.

Why it matters: The recovery in crude — if it holds — will put new upward pressure on U.S. gasoline prices, which have already rallied recently after months of steep declines.

  • Continued Saudi-Russian cooperation despite Vladimir Putin’s invasion of Ukraine is also the latest sign of Riyadh’s strained relationship with the White House.

Threat level: U.S. officials are “reportedly working around the clock to avert major cuts, urging countries to maintain strong defense and strategic ties,” RBC Capital Markets said. (CNN has more.)

What they say: “The president is disappointed by OPEC+’s short-sighted decision to cut production quotas at a time when the global economy is dealing with the continued negative impact of Putin’s incursion into Ukraine,” said National Security Adviser Jake Sullivan and Director of the National Economic Council Brian. Deese said in a statement.

  • “At a time when maintaining global energy supplies is of the utmost importance, this decision will have the most negative impact on lower and middle-income countries, which are already reeling from high energy prices,” they added.
  • They said the Energy Department would supply another 10 million barrels to the market next month through the Strategic Petroleum Reserve.

The big picture: Rice University’s Jim Krane tells Axios that the likely cuts reflect the persistence of Saudi-Russian market cooperation that began half a decade ago in response to rising U.S. shale production.

  • “Putin has managed to insert himself into a pretty strong relationship between the United States and Saudi Arabia, and he’s destabilizing that relationship right now,” said Krane, a fellow at the school’s Baker Institute for Public Policy.

Intrigue: The White House had been aggressively promoting pump price relief for weeks, but the reversal could revive a political threat in the upcoming election.

  • “Higher prices are bad news for Democrats,” ClearView Energy Partners’ Kevin Book tells Bloomberg.

What we watch: How the market reacts after the announcement.

  • Oil analyst Ellen Wald’s latest column notes that more price gains are “likely to be tempered” by concerns that the global recession is hurting demand.
  • GasBuddy analyst Patrick De Haan tells Axios that the trajectory of U.S. gasoline prices varies regionally, with prices likely to rise along the Gulf Coast, Southeast, Northeast and East Coast.
  • But recent refinery problems and maintenance in the Great Lakes region and on the West Coast have already pushed up prices there.
  • “Once these issues are resolved, the drop will likely outpace the increase in oil prices,” De Haan said, but notes that the OPEC+ cut means the amount they will have to cut again will be smaller.

At the same time, the US has limited options to respond to an OPEC+ cut.

  • The White House is already deep into releasing a historically large strategic oil reserve.
  • Meanwhile, despite attractive prices, production growth has stalled for now as companies deal with various supply chain and labor issues, pressure from investors to exercise discipline and more.

Yes, but: “Tougher crude oil markets … could give the White House additional impetus to consider restricting exports of refined products as a brake on rising pump prices,” ClearView Energy Partners said Wednesday morning.

Editor’s note: This story has been updated with details from the White House statement and OPEC’s proposed production cuts.