Canadians wanting cheaper gas prices will see less oil on the marketplace next month thanks to a significant production cut by an alliance of oil-exporting nations.
In November, OPEC+ will slash its global output by two million barrels per day at a time when international inventories of crude oil remain tight. But will OPEC+’s cuts cause Canadian gas prices to rise?
Analysts don’t see that being the case.
“I don’t think it’s going to have much of an impact on crude price,” said Antoine Halff, an adjunct senior research scholar at the Center on Global Energy Policy at Columbia University.
“The crude price went up a little bit in the immediate aftermath of the OPEC meeting and the decision announcement, but it has since come off a little bit. … It’s clear that the market has not really been shaken.”
Why is OPEC+ cutting production?
OPEC+, an intergovernmental organization of oil-exporting nations, said on Oct. 5 its scheduled cuts were made to support waning oil prices.
Oil had been trading well below its summer peaks because of fears that major global economies such as the U.S. or Europe will sink into recession due to high inflation, rising interest rates and energy uncertainty over Russia’s war on Ukraine.
Saudi Energy Minister Abdulaziz bin Salman stressed last month OPEC+’s stated role as a guardian of stable energy markets.
“We are here to stay as a moderating force, to bring about stability,” he told reporters.
The loss of two million barrels a day — two per cent of global supply — had the White House accusing Saudi Arabia of siding with Russian President Vladimir Putin, who has seen many nations veer away from Russian oil due to the Ukraine war.
Bin Salman has rejected Washington’s assertions, saying the decision was made in a non-political “silo” where the focus was management of oil markets.
While OPEC+ plans to cut two million barrels per day, member countries have struggled to meet their production quotas this year, which has analysts questioning if the alliance can meet its own targets.
Halff, who is also chief analyst at Kayrros, a climate and energy data analytics company, told Global News while some analysts predict an actual cut of one million barrels a day, he feels it’ll likely be anywhere between 700,000 to 900,000 barrels per day.
“It’s not clear that OPEC will deliver on this commitment. They might, in the end, decide to produce more than they said they would produce,” he told Global News.
“It will depend on market conditions to a large degree.”
What could the impact be?
Earlier this year, Canadians saw gas prices soar to record highs due to several factors, including the Ukraine war and supply levels as oil producers struggled to meet increased demand amid easing COVID-19 restrictions.
High gas prices were a significant driver of overall inflation earlier in the year; as gas prices dropped, overall inflation declined, though it still remained high enough for the Bank of Canada to raise its prime lending rate 50 basis points to 3.75 per cent on Wednesday.
When it comes to oil prices, international benchmark Brent dropped as low as US$84 in recent weeks after spending most of the summer at more than US$100 per barrel. U.S. crude rose to US$87.64, and international benchmark Brent went up to US$93.21 after the OPEC+ decision on Oct. 5. At one point on Wednesday afternoon, Brent was trading at US$95, while U.S. crude sat at US$88.
In recent months however, Brent oil prices have dropped, due in part to tighter monetary policy globally and softening demand in China, and those factors are outweighing the effects of OPEC+’s decision, the Bank of Canada said in its latest Monetary Policy Report on Wednesday.
The Bank of Canada projects prices for Brent will stay near current levels in the future, with prices for U.S. crude and Western Canadian Select to be US$5 and US$20 below Brent prices.
Oil prices are the major driver of gasoline costs, and if OPEC+’s decision was to bring prices up, “it’s hard to judge its effectiveness at this point,” said Gregory Brew, a post-doctoral fellow at the Jackson School of Global Affairs at Yale University.
“If the OPEC production cut was designed to stabilize prices, it’s been reasonably successful at holding them,” he told Global News.
Therefore, it’s likely OPEC+’s cuts will keep oil and gasoline prices elevated, said Patrick De Haan, head of petroleum analysis at GasBuddy.
“At a time when markets need more oil, as the global economy recovers from the effects of COVID-19, global inventories of crude oil remain relatively tight,” he said.
“So, OPEC’s decision, though may not seem like a large amount of oil, it will over time likely further tighten global supplies of oil and keep oil prices higher.”
OPEC+’s planned cuts come on top of a looming European ban on most Russian imports starting in December. Also, a move by the U.S., Canada and other G7 nations to impose a price cap on Russian oil that month could reduce supply if Moscow retaliates by refusing to ship to countries and companies that observe it.
In 2021, Russian oil output reached 10.5 million barrels per day, making up 14 per cent of the world’s total supply, according to the International Energy Agency’s website.
In an effort to lower American gas prices, on Oct. 19, U.S. President Joe Biden released 15 million barrels from the U.S. strategic reserve. He had announced earlier in the year the release of 180 million barrels over six months. Biden also approved the release of 50 million barrels in November 2021 and promised to investigate the possibility of price gouging.
In Canada, some provincial governments implemented tax relief programs to lower the cost of gas. On Oct. 1, Alberta reintroduced a tax of 4.5 cents per litre on fuel after its temporary gas relief, introduced earlier this year, ended. Alberta was taxing 13 cents per litre on fuel previously. Meanwhile, Ontario’s gas tax was cut to nine cents per litre from 14.7 cents effective July 1 and ending Dec. 31.
Analysts say there’s little governments can do now to reduce prices at the pumps in the short term and wonder how a pending European ban on Russian oil and price cap will impact the marketplace.
“That will almost certainly bring down Russian production … That would place tremendous upward impact on prices, though again, it will depend on how much production Russia actually ends up cutting,” said Brew.
“I would say moving past this (OPEC+) cut, that’s the big question facing supply and demand, that’s the big question facing prices and ultimately a big question facing consumers.”
— with files from The Associated Press and The Canadian Press