The prices of Brent crude oil have increased by more than 30% in just three months. The gasoline prices in August increased 10.6% compared to July. Such a steady increase in fuel prices has forced a lot of Americans to switch to electric vehicles. However, with the rise in energy prices, even electric vehicles are costing their owners a significant amount of money.
Several analysts have predicted that Brent crude could surpass $100/bbl very soon. If you are interested in the stock market, this may be a good time to invest in some cheap gas and oil stocks. But before you do that, let’s explore the factors that are responsible for the rising fuel prices in the US.
Production Cuts by Russia and OPEC:
One of the major reasons for the rising oil prices is the supply cuts by Russia and the OPEC (Organization of Petroleum Exporting Countries). In a recent statement, Saudi Arabia announced the extension of its 1 million barrels per day (BPD) production cuts through at least December 31. Russia also announced a production cut of 300,000 barrels per day through the end of this year.
The ongoing Russia-Ukraine conflict has significantly affected the Russian economy. Also, the G7 nations have put a price cap of $60 per barrel on crude oil imports in response to the war. This price cap has now restricted Western shippers and insurers from handling Russian oil at a price higher than $60 per barrel, costing Russia around $100 billion in oil revenue.
Moreover, recent reports suggest that Saudi Arabia may need oil prices to reach the rate of $100 per barrel to finance several government projects envisioned by Crown Prince Mohammed bin Salman. The futuristic city of Neom, which is worth $500 billion, is expected to be one of those projects. Some reports also suggest that OPEC is committed to the high pricing of oil to fund its diversification efforts and balance its fiscal budget.
Falling Number of US Rigs:
Previously, the US oil companies have aggressively invested in boosting their oil production to counter the rising oil prices and tight supplies. However, there has been a significant drop in the total US rig count recently as the oil companies take a more cautious approach. There is an 18% drop in the number of US rigs from a year ago.
In the past, oil companies had made great efforts to increase oil production. They had even taken massive debt loads to finance their drilling efforts. However, when oil prices went down in 2014 and 2020 (during the COVID-19 pandemic), over-leveraged oil companies suffered a significant impact. This explains why the oil investors and managers in the US are so cautious this time around.
Higher Demand:
The US economy has performed way better than most experts had anticipated in 2023. In fact, the US GDP grew by 2.1% in the second quarter. While the American economy remains strong for a major part of the year, China’s economic growth seems lower than expected. And now that China’s services and travel industries are booming, there is a significant growth in its transportation fuel consumption.
Crude oil imports of a record 12.4 bpd (million barrels per day) in August by China have drained international supply. Experts worry that if OPEC and Russia maintain the ongoing supply cuts through the end of this year, despite the positive demand from the Asian market, Brent prices could easily go beyond $100/bbl before the new year.
Conclusion
The soaring demand for fuel and production cuts from OPEC and Russia have certainly made a significant impact on fuel prices in the US. Previously, President Biden had authorized the release of one million barrels of oil per day in response to the Russia-Ukraine conflict in 2022.
However, to protect and preserve Alaska’s Federal National Petroleum Reserve, the administration has announced a new ban on drilling in the area. The bottom line is that the price of fuel (such as gasoline) is not going to come down any time soon.
Nyra handles business research, writing financial documents, news items, articles, and study materials about finances.
