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As gas prices continue to fall, the Saudi Arabia-Russia-led coalition of oil-producing nations opted on Sunday to stem the fall by cutting global oil supplies.
The decision to keep production steady was made at a virtual meeting of the Organization of Petroleum Exporting Countries and its partners called OPEC Plus on Sunday.
Sunday’s move comes after the group unleashed a diplomatic firestorm at its last meeting in October when it agreed to cut production by 2 million barrels a day. The move drew a scathing rebuke from the White House and a vow from President Biden to impose “consequences” on Saudi Arabia, the organization’s most powerful member.
But predictions that October’s cut would push up gas prices and give Russia new funds to fund its war in Ukraine proved wrong. Just a few weeks after the consortium announced this cut, oil prices began to fall. Gasoline is now cheaper than it has been in nine months, and consumers are paying lower prices than just before the Russian invasion began.
US gas prices fall to $3 a gallon as global demand falls
On Sunday, the average price for a gallon of regular US gasoline was $3.41, according to AAA, well below its June peak of over $5.
The slump in oil and gas prices is in large part due to a fall in demand amid fears of a global recession, renewed Covid lockdowns in China and the impact of rising interest rates in the United States. Meanwhile, some key US oil refineries that were down for maintenance and repairs have come back online, contributing to the world’s fuel supply.
All these forces have put OPEC Plus in a difficult position. The group’s leader, Saudi Arabia, has been under pressure from the United States to either boost production or at least block further production cuts. But current market conditions with falling prices have validated the price cuts the Saudis fought for in October, despite the diplomatic fury they unleashed.
The organization said in a statement on Sunday that October’s cut was “driven purely by market considerations and was subsequently recognized by market participants as the necessary and correct course of action to stabilize the global oil market.”
The next OPEC Plus meeting to review production has been set for June. But the group said in its statement that the timetable could change, and it could “convene at any time and immediately take additional action to address market developments and support oil market balance and stability, if needed.”
In the background of OPEC Plus internal deliberations this weekend, Ukraine’s allies reached an agreement on Friday to cap the price of Russian oil. The cap set by the Group of Seven and Australia is meant to keep Russian oil flowing into some global markets, but limit the profit the Kremlin can make to fund its war machine.
Countries implement the price cap as a European import ban on Russian oil comes into effect on Monday. Since this ban does not apply to other parts of the world that still buy from Russia, the price cap is seen as an additional tool to limit Russian oil revenues. Europe and the United States will enforce the measure using their considerable control over oil transport companies and the companies that provide them with insurance.
OPEC Plus has been closely monitoring European deliberations on the price cap as it poses a direct threat to its control of oil markets. The cap essentially works as a “buyers’ cartel,” where countries band together to influence the price oil producers can charge.
“An institutionalized buyers’ cartel could threaten to undermine OPEC+’s pricing power,” market research firm ClearView Energy Partners wrote in a note to clients late last week.
Agreeing on the cap proved a difficult balancing act as some European nations, such as Germany, feared that under-pricing would prompt Russia to retaliate by disrupting supplies and sending oil prices skyrocketing around the world . Other nations, particularly in Eastern Europe, wanted a much lower price to inflict pain on Russia.
But the countries eventually settled on $60 a barrel, which is about the amount Russia can sell its oil for without a cap. That decision likely allayed concerns among OPEC Plus members that the cap would undermine their grip on oil markets.