Oil prices increased Monday on the news that Saudi Arabia and Russia would each impose additional supply cuts for the month of August, amounting to roughly 1.5% of global supply and threatening to push up gas prices for drivers across the United States through the second half of the year.
Saudi Arabia said it would maintain its supply cut of 1 million barrels per day through August and warned it could extend the cuts further if weaker than anticipated global demand persists. The extended cuts put the kingdom's daily production down to just 9 million barrels per day, its lowest point in several years.
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Meanwhile, Russian Deputy Prime Minister Alexander Novak also announced Monday his country would also slash its oil supply in August by 500,000 barrels per day.
"Within the efforts to ensure the oil market remains balanced, Russia will voluntarily reduce its oil supply in the month of August by 500,000 barrels per day by cutting its exports by that quantity to global markets," Novak said in a statement.
Novak added later that Russia would also seek to reduce its production by the same amount, likely due in part to Russia’s limited crude oil storage capacity.
The announcements from the world’s two largest oil producers immediately caused prices to climb, with futures for international benchmark Brent crude rising as high as $76.60 per barrel on Monday afternoon — up 1.6% from the previous day of trading.
Meanwhile, futures for U.S.-based West Texas Intermediate saw a 54-cent increase, climbing to upwards of $71.18 per barrel by midday.
News of the supply cuts come as global crude demand has lagged in recent months, underpinned primarily by slower-than-expected Chinese demand recovery, as well as fears of a U.S. recession.
"This additional voluntary cut comes to reinforce the precautionary efforts made by OPEC+ countries with the aim of supporting the stability and balance of oil markets," the Saudi state-run news SPA quoted a Ministry of Energy official as saying early Monday.
But analysts have widely expected global demand to recover in the second half of the year. The U.S. Energy Information Administration projected in its most recent Short-Term Energy Outlook that global oil prices would rise to around $79 per barrel in the second half of 2023.
These higher prices would be passed on to drivers as well, as the EIA notes, since crude oil accounts for more than half of U.S. gasoline prices.
And while the national average gas price now stands at just $3.53 per gallon, a roughly $1.30 drop compared to the same point last year, analysts note that prices continue to be relatively high.
“Gas prices are $1.30 per gallon less this year than last, but they are still high compared to historical averages,” Andrew Gross, AAA's spokesperson, said in a recent blog post. “The previous record average high price for gas on July Fourth was $4.10 in 2008, while the low was $1.39 in 2001.”
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Patrick De Haan, the head of petroleum analytics at GasBuddy, told the Washington Examiner in an interview earlier this year that he's “cautiously optimistic” about U.S. gasoline prices this summer compared to last year — though he warned that things could change this summer if there is a sudden increase in demand, especially if supplies were to be affected abruptly due to a natural disaster or a hurricane.
“Looking back, compared to the five- and 10-year averages, we are still seeing gas prices that are above average,” he said. “It’s just compared to last year’s sky-high stratospheric prices that [drivers] are feeling some relief.”