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Oil Could Pass $100, Pushing Up Gas Prices

Gasoline prices will rise along the east coast and in the South while drivers in California, Arizona and Nevada will receive a reprieve.
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Crude oil prices spiked in the aftermath of OPEC and Russia's decision to lower production as inventory levels remain lower despite increased output.

West Texas Intermediate or WTI, the U.S. benchmark price for oil, traded at $88.04 at 9:57 a.m. ET, up by 0.21% after skyrocketing for three days.

The OPEC+ alliance agreed to lower its daily output by two million barrels, the largest production cut since 2020 on Oct. 5. 

After three days of gains, pushing prices up by 10%, WTI traded close to $88 a barrel.

The OPEC+ 2 million barrel a day headline quota cut for November amounts to a 0.7-0.8 million barrel a day cut to “actual supply given that most member countries are already producing below their individual quota levels,” said Shin Kim, head of oil supply and production analytics, S&P Global Commodity Insights.

"The quota cut agreement is material and sends a clear signal that Saudi Arabia and the group together are willing to stabilize and support oil markets,” she said.

Russia said that its domestic output could decline from a proposed oil price cap.

The Biden administration had previously sought increased output from oil producers due to inflationary headwinds.

The Biden administration is expected to ease sanctions on Venezuela and allow U.S. oil producer Chevron  (CVX) - Get Free Report to restart drilling for oil, according to a Wall Street Journal article.  Venezuela would be able to sell its oil to both the European Union and U.S. oil markets.

Shares of Chevron have rebounded by 51.42% during the past year and is up by 33.22% year-to-date.

$100 Oil On the Horizon

Brent crude oil, the international benchmark price, is also rising and was trading at $93.44 on Oct. 6, up by 0.10%.

Goldman Sachs now estimates that the price for Brent oil will now reach $110 a barrel during the fourth quarter after the decision made by OPEC+ as inventories will decline.

"As we have long argued, the oil market’s buffers (stocks and spare capacity) remain critically low, and higher prices remain the key viable, long-term solution to increased inventories in the short-term and higher supply capacity medium-term," said Damien Courvalin, the head of energy research at Goldman Sachs. "This is consistent with our view that long-term shortages require short-term surpluses -with the market now instead facing large deficits in coming months."

Oil prices could move even higher due to lower global inventories of oil he estimates.

"Should the market return to our scarcity pricing framework, requiring demand destruction as a rebalancing of last resort, prices could yet move $30+/bbl higher. For now, we raise our 4Q22-1Q23 forecasts conservatively by $10/bbl, to $110/$115 respectively, but acknowledge price risks are skewed potentially even higher," Courvalin said.

Morgan Stanley said the lower output will push Brent crude oil prices back to $100 a barrel.

“Notwithstanding demand concerns, the combined impact of OPEC+’s production cut and the EU embargo in Russia’s production suggests a tighter oil market ahead,” Morgan Stanley analyst Martijn Rats wrote in a report. “With our tighter balances, we suspect that Brent will find its way to $100 a barrel quicker than we estimated before.”

Higher oil prices will be the new norm for the short-term since there has not been a large decline in oil demand, only a cooling off, Gregory Daco, chief economist at EY-Parthenon Ernst & Young, told TheStreet. 

"For the time being, the supply costs will maintain upward pressure on prices," he said. "The $100 price level is likely to be a good reference point for next year."

The action by OPEC and its allies on Wednesday means there is "desire to have pieces stabilize around $100," Daco said.

Brent oil prices could reach $100 by the fourth quarter since OPEC is now in control of global oil pricing, John LaForge, head of Real Asset Strategy at Wells Fargo Investment Institute, told TheStreet.

OPEC is set on maintaining prices, "if not gradually moving it higher with such moves as the 2 million barrel cut yesterday," he said. 

The U.S. will not play the role in setting prices like it did prior to covid-19 because of sustained lower oil production, LaForge said. 

"The environmental narrative has proven too strong over the last few years and the U.S. is reacting by not producing the oil it once did," he said. 

In early 2020, the U.S. was producing 13.5 million barrels per day of petroleum when Brent was at $50. Now with Brent at $95 a barrel, the U.S. is producing 11.7 million barrels per day.

Higher oil prices tend to exacerbate inflationary spending on business investments since the cost of capital rises and it also reduces disposable income growth and weighs on private sector activity, Daco said.

"As global growth is slowing, these types of rapid and significant production cuts are taking a bit of gamble with the global economy at a time when the outlook appears quite fragile," he said.

Consumers will also feel the impact to their budgets.

“That erodes real disposable income growth," Daco said. "You will have a drag on consumer spending activity. The typical rule of thumb is for $10 increase in fuel, there is a 0.2% drag on consumer spending growth."

The oil production cut is another "wrinkle in the Federal Reserve's decision-making process" since the central bankers are "already in a very difficult place with inflation pricing to be more persistent than anticipated with the economy likely headed to a recession," he said.

Oil prices shooting up to $100 will not sway the Fed's decision on whether to hike rates later this year, LaForge said.

"Overall inflation will be coming down and energy prices are already discounted by the Fed as 'volatile' and not worthy of being included in the core metric," he said. 

Since gasoline prices already reached the $5-$7 a gallon range earlier this year, $100 oil "also is not that big of a deal," LaForge said.

Gasoline prices would likely hover around the high $3 a gallon to low $4 a gallon range this winter. 

"When gasoline sentiment comes into play is when the rise in price is short and shocking," he said. "We do not believe that $100 oil can do that."

Gasoline Prices Falling in California

The national average is up $0.25 a gallon from the bottom price and is $3.87 per gallon on Oct. 6, said Patrick De Haan, head of petroleum analysis, GasBuddy, a Boston-based provider of retail fuel pricing information and data.

Several states could see a slight reprieve, mostly in California, Arizona and Nevada, but also in the midwestern states of Michigan, Indiana, Ohio, Illinois and Wisconsin.

Drivers in the south and east coast, northeast and Rockies, prices will continue its upward rise by $0.10 to $0.12 a gallon during the next two weeks.

The most common price is $3.29 a gallon for gasoline on Oct. 6 while the top 10% gas stations are selling a gallon for $6.24 and consumers are paying $2.96 a gallon at the bottom 10% of stations. The median price of gasoline is $3.54.

Drivers who use diesel gasoline have also received a break in prices.

"Diesel's gap to gasoline has fallen to ~$1/gal, the lowest since mid-July... gasoline average $3.87, diesel $4.87," he said.