Gasoline prices in the United States have been steadily increasing throughout the summer, and the recent production cuts by Saudi Arabia are only making matters worse for American drivers.

On Thursday, Saudi Arabia announced its decision to extend the current production cut of 1 million barrels per day through September. They also hinted that the reduction could potentially be extended even further or deepened. These cuts were initially implemented in July and were initially set to run through August.

According to Phil Flynn, an analyst at Price Futures Group, these production cuts by Saudi Arabia will undoubtedly contribute to the rise in gasoline prices. He points out that there are multiple factors influencing the increase including refining issues and higher-than-expected demand.

Earlier reports have already indicated that gas prices will continue to rise, and analysts warn consumers to brace themselves for further increases in the near future.

The effects of Saudi Arabia’s production cuts on U.S. prices may not seem immediately apparent. After all, in 2022, only 7% of U.S. crude imports came from Saudi Arabia, as reported by the Energy Information Administration.

However, these cuts do have a significant impact. This is because oil prices are heavily influenced by global factors rather than just developments within the United States. Matt Smith, lead analyst for the Americas at Kpler, explains that when Saudi Arabia removes an additional 1 million barrels per day from the market, it creates a tighter global supply of crude oil. As a result, buyers who typically rely on Saudi crude will have to seek alternative sources to fulfill their needs. This leads to upward pressure on global price benchmarks such as Brent and West Texas Intermediate crude.

The recent rebound in oil futures is a clear indicator of the market’s reaction to the news of Saudi Arabia’s extended production cuts. Brent crude, the global benchmark, rose by $1.94 or 2.3% to settle at $85.14 a barrel on ICE Futures Europe. Similarly, West Texas Intermediate crude gained $2.05 or 2.6% to close at $81.55 a barrel on the New York Mercantile Exchange.

As gasoline prices continue to soar and the impact of Saudi Arabia’s production cuts reverberate throughout the market, it remains uncertain how much higher prices will climb and how long they will stay at elevated levels.

The Impact of Saudi Arabia’s Cuts on Crude Prices

The recent cuts made by Saudi Arabia, along with reductions by other OPEC+ members including Russia, have been identified as the main driving force behind the rally in crude prices. As a general rule, a $10 increase in the price of a barrel of crude leads to an approximate 25 cent rise in the average U.S. gasoline price.

According to AAA, the increase in pump prices has been in line with the average price per gallon which rose from $3.535 a month ago to $3.821 on Tuesday. Analysts have attributed this rise to refinery outages, some of which were caused by extreme heat.

Furthermore, Saudi Arabia’s warning that cuts could be extended or deepened reaffirms the kingdom’s commitment to maintaining higher prices. Russia’s pledge to reduce exports by an additional 300,000 barrels a day through September, on top of earlier production cuts, adds further weight to this message.

However, the growing partnership between Russia and OPEC+ has sparked tensions between the Biden administration and Saudi Arabia. As U.S. retail gasoline prices continue to rise, it is expected that there will be an increase in energy shuttle diplomacy between Washington and Riyadh in the coming months, according to Helima Croft, head of global commodity strategy at RBC Capital Markets.

Despite pausing crude buybacks for refilling the Strategic Petroleum Reserve, the U.S. Energy Department may need to resort to their longstanding strategy of engaging with Saudi Arabia if prices continue to climb higher, especially with the upcoming election season set to commence soon.

It remains to be seen how these developments will shape the future of crude prices and the global oil market.

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