Why Prices at the Pump Are Heading Higher

It feels like ages ago that filling your gas tank looked like this…

In reality, it’s been merely a year and a half.

But while we’ve felt relief at the pump since, that reprieve is starting to fade.

After sitting below $80 per barrel since March 2023, the price of crude oil in August rose to its highest level since November 2022.

Of course, if we exclude last year, the price of crude on August 11th of $85.59 per barrel would be the highest since October 31, 2014.

Moves like that put Federal Reserve Chair Jerome Powell and Co.’s inflation-tamping efforts on the hot seat.

Of course, oil is a complicated commodity, influenced by factors unknown to most others.

That’s why investors must investigate whether rising prices are a sign of more inflationary trouble ahead. Or a product of oil’s unique equation…

The Game is Rigged

As investors, we understand the basic concept of supply and demand.

The higher the demand for a good or asset, the tighter the supply, the more prices for that product surge… at least until demand destruction is reached.

And we often hit points of demand destruction in oil markets.

But that’s due to the fact the supply of oil is constantly manipulated.

The Organization of the Petroleum Exporting Countries (OPEC) is precisely what its name suggests.

Its purpose is to “secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the company.”

In other words, it controls the supply of oil to control (or dictate) prices.

So, with the price of gas in the U.S. $0.60 higher per gallon now than at the start of 2023, you must ask yourself…why?

Star of the Show

Thirteen member nations comprise OPEC.

But one country is the real star of the show… Saudi Arabia controls roughly a third of the group’s oil reserves.

According to Kpler, crude exports from Saudi Arabia through the first 24 days of August were the lowest since June 2020. That’s when oil prices were plummeting during the pandemic as demand cratered.

In June, Saudi Arabia announced it would limit oil exports to 1 million barrels per day (bpd) in July.

In July, it announced it would do the same in August.

In August, it announced it would do the same in September.

Now, as you’d imagine the market is anticipating a similar announcement for October. Though, questions now linger about whether this may extend into the first two quarters of 2024.

Global demand for oil is forecasted to rise to 101.89 million bpd this year.

With that in mind, Saudi Arabia accounted for more than 17% of global seaborne oil exports in 2022.

But here’s the kicker… those cuts announced in recent months from Saudi Arabia were unilaterally implemented on top of OPEC announcing collective cuts of 1.2 million bpd from May through the end of the year.

You can see how supply and demand aren’t exactly lining up.

And it’s all happening at a particularly threatening time…

Reserving Room to Worry

The supply of oil consumed daily is only part of this discussion. There’s also the matter of the strategic oil reserves…. Most notably the U.S.

With supply constraints in place for the past year and a half, we’ve seen nations tapping into their stockpiles at a higher pace than normal.

In fact, going back to 2017, global onshore crude stockpiles have never been lower.

Which makes the 1-million-bpd month-over-month OPEC cuts even more troublesome.

Not only is the short-term need for oil a factor but the need to replenish these depleted stockpiles also looms. This only further complicates the demand side of the equation.

In the week ending August 18, U.S. crude inventories declined 6.1 million barrels. Analysts were expecting a 2.8-million-barrel drop.

The problem is unrelenting demand from Americans for travel…

Refineries have been pumping out the most gasoline, jet fuel, and petroleum products since January 2020.

But there’s hope among industry analysts that some of OPEC’s less-powerful members could supplement the oil lost to Saudi Arabia’s cuts...

Friends in Unlikely Places

Sometimes necessity forges unlikely allies.

And that brings us to OPEC’s “fragile five.” These are Nigeria, Iran, Iraq, Libya, and Venezuela.

These countries – due to widespread political unrest, sanctions, or various other reasons – lag in their output quotas.

But the tide is turning…

Projections now call for a 900,000-bpd increase from these five countries for the remainder of 2023 and into 2024.

This would help offset some of the fallout of Saudi Arabia’s cuts.

Unfortunately, this is as ominous as it is beneficial.

“All of a sudden [the fragile five] are sources of growth, and they will be sources of growth for five, four years, or maybe even longer in the case of Iraq and Venezuela,” Citigroup (C) head of commodities research, Ed Morse told Bloomberg.

He went on to say, “It strikes us that the core OPEC+ countries have a problem on their hands.”

Which at least in part means the inflation-worried consumer does too.

Such is the peril of living at the whims of a manipulated market.

Add into the mix that one of the world’s largest oil producers and exporters – Russia – is under heavy sanctions due to the war in Ukraine, and that supply picture is a lot tighter.

But keep in mind, the U.S. has risen to be the largest oil producer in the world. We’re also the “Saudi Arabia” of natural gas. All of that’s thanks to the shale formations found here.

And every time Saudi Arabia or OPEC takes a step back, that’s an opportunity for American oil to flood in.

Until then,

Kyle Ottenheimer