Gas prices are expected to spike. Here's why
New York (CNN Business)OPEC and its allies are mired in a stalemate. American drivers could pay the price.
For the second straight day, OPEC+ surprised observers Friday by failing to reach an agreement on whether to add more barrels to an oil market screaming for more supply.
The group said it will try again Monday to forge a deal, making what was scheduled to be a one-day meeting stretch to at least three.
“This is an epic standoff,” said Robert McNally, president of consulting firm Rapidan Energy Group.
The high drama comes as Americans hitting the road for the Fourth of July holiday are greeted by a seven-year high in gasoline prices, adding to inflation headaches already hitting the economy.
Wall Street analysts have said that only OPEC+ can come to the rescue by pumping more oil to meet surging demand. Yet the group is clearly struggling to agree on the terms to do that.
While Russia has been vocal about the need to pump more oil, analysts said a deal has been prevented so far by concerns from the United Arab Emirates over the structure of the agreement.
“Dissent in the ranks highlights how fractious relations are within the group,” said Matt Smith, director of commodity research at ClipperData. “UAE is looking after its own interests, rather than toeing the line of core OPEC.”
Crude’s wild ride from negative-$40 to $75
US oil prices finished above $75 a barrel on Thursday for the first time in nearly three years. It’s a remarkable recovery from April 2020 when crude crashed to negative $40 a barrel.
The rebound has been driven in part by soaring demand for gasoline and jet fuel as the pandemic winds down and health restrictions ease.
Yet at the same time, supply is being held back.
OPEC+ has only gradually added back production that it aggressively sidelined during last year’s oil crash. And after years of poor financial performance, US frackers are under pressure from Wall Street to exercise restraint before adding output.
If OPEC+ fails to reach a deal, there could be a dramatic impact on prices — in either direction.
The bullish scenario laid out by analysts is that OPEC+ agrees not to pump any more barrels, leaving supply unchanged. Given that demand is rising, that would most likely send oil prices sharply higher. Investors had been anticipating more output.
But there’s also the risk that this current disagreement causes the alliance to collapse altogether, resulting in a messy free-for-all as nations add too many barrels to the supply, echoing last spring’s price war between Saudi Arabia and Russia that sent prices spiraling lower.
“Even the whiff of disorder would send oil prices down,” said McNally. “When things with OPEC go off the rails, the range of outcomes widens enormously. It’s Netflix-level drama and disorder.”
Helima Croft, global head of commodity strategy at RBC Capital Markets, said 6 million barrels of oil suddenly getting added back to the market would “obviously be bearish” for the market
For many years, the UAE and Saudi Arabia have been close partners, forming the region’s most important alliance and a powerhouse within OPEC. Saudi Arabia is the de factor leader of OPEC and the UAE was its third-biggest producer in 2020.
Yet relations between the two nations have been tense more recently and analysts said that could factor into the current OPEC deadlock. In fact, some OPEC watchers see a risk that the UAE could leave the cartel altogether.
White House: Biden is concerned by high gas prices
White House Press Secretary Jen Psaki acknowledged Friday that President Joe Biden is “absolutely” concerned about the rising price of gasoline. Yet Psaki expressed confidence that there is enough spare oil production capacity around the world to meet energy demand.
“Despite all of the talk around energy transition, nothing terrifies an elected American official more than a spike in gasoline prices,” said McNally, a former energy official under President George W. Bush. “Few things anger Americans more than that.”
At times during his presidency, former President Donald Trump berated OPEC, for either failing to pump enough oil or for pumping too much.
Psaki, the White House press secretary, said Friday she couldn’t say whether the administration has been in contact with OPEC officials.
“The Biden administration is no question taking a hands-off and fingers-crossed approach,” said McNally.
Of course, $80 oil could change that thinking.
“Will Biden have to take a page from Trump and fire up the OPEC hotline?” asked Croft.
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