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OPEC+ oil production cuts ‘more likely’ between 900,000 to 1 million barrels a day: Analyst

Lipow Oil Associates President Andrew Lipow joins Yahoo Finance Live to discuss the impacts of OPEC+ slashing its production target, oil prices, and the White House's sentiment towards energy markets heading into the winter season.

Video transcript

SEANA SMITH: Oil adding to recent gains, above 87 bucks, its highest close that we've seen in three weeks. This comes after OPEC+ announced plans to cut production by 2 million barrels a day, its biggest oil cut that we've seen since 2020.

We want to bring in Andy Lipow, president of Lipow Oil Associates. Andy, it's great to see you again. So of course, the big question here is what this does to the price of oil. Goldman out this afternoon, raising its fourth quarter forecast to $110 a barrel, saying that this is very bullish for crude. What do you think?

ANDREW LIPOW: Well, I think it is bullish. And we saw on Monday and Tuesday the oil market react prior to the meeting and go up by $7 a barrel. And here, we've added another dollar today on the back of the OPEC+ announcement.

The one thing that I would point out is while the production cut is advertised as 2 million barrels a day from their existing quotas, OPEC+ is already producing 3.6 million barrels a day underneath their quotas. So the actual impact is more likely to be between 900,000 barrels a day and a million barrels a day.

RACHELLE AKUFFO: So, then, Andrew, in terms of the timing of this because traditionally, OPEC, OPEC+, they do tend to stay the course in this. What do you think was perhaps the tipping point that led to this?

ANDREW LIPOW: Well, I think there's a number of things, starting with OPEC+ concerned about the world going into a recession, which, in part, was caused by high energy prices earlier this year when we saw crude oil prices rallied between $130 and $140 a barrel, as well as the high natural gas prices that we're seeing in Europe, which is causing a contraction in industrial output.

So I think they wanted to take a preemptive step to reduce production in light of declining demand. I think another reason that they've cut production is to stabilize prices because they see a stronger dollar and higher inflation rates eating into their budgets.

SEANA SMITH: Andy, we heard from the Biden administration shortly after this was announced, saying that it will continue SPR releases as appropriate, also looking for additional tools to reduce the organization's control over energy prices. They talked about doing this with Congress. What does that potentially look like and entail?

ANDREW LIPOW: Well, there's very few levers that the government can actually do. If we want to reduce the price of fossil fuels, we need to get more of them out of the ground. And the administration really hasn't been favorable to adopting those policies. One thing that has been discussed is perhaps limiting or banning the export of crude oil or refined products.

But if we think about that, though, we're a part of the global market on crude oil. If we were to export less, some other place in the world, namely Europe or Asia, would go without. On the refined products, we're exporting a significant amount down to Mexico, Chile, Brazil, Argentina, and the rest of South America, as well as Europe. So these policies, in order to reduce exports and build inventories here, have significant ramifications between the US and its allies.

RACHELLE AKUFFO: And so, to that point then, when you have these sort of shifting dynamics here, what does this do in terms of US influence on OPEC and OPEC+? And who are OPEC and OPEC+ primarily, then, focusing on?

ANDREW LIPOW: Well, I think that OPEC+'s decision is really showing the waning influence of the United States. And they're really snubbing their nose at the higher energy prices that are impacting, whether it's the US or the European Union. When we do look at OPEC+, we have the core OPEC 10, which excludes Iran, Libya, and Venezuela. And then we've got a number of countries outside of OPEC, the non-OPEC 9, which, of course, includes Russia.

But at its core, the decisions really rest with Saudi Arabia, the United Arab Emirates, and Kuwait, who are currently producing at their quota. And those are the three countries that were reluctant to increase beyond their quota to make up for the shortfalls from countries like Nigeria and Angola.

SEANA SMITH: This clearly is not what the White House wanted, what the Biden administration wanted the decision to be. Andy, of course, this comes amid concerns about a weakening economy. If we do see oil prices jump from here, if we do see $100 a barrel, I guess, how big of a hit do you see that potentially meaning, then, for demand? I guess, to what extent do you see demand falling off if we are back above 100 bucks a barrel?

ANDREW LIPOW: Well, I think world oil demand could drop 1 to 2 million barrels a day. Now, if we put that in context with really high natural gas prices in Europe, I think OPEC+ is fearing even deeper declines in demand, maybe 3 million barrels a day, which could really put oil prices under pressure.

RACHELLE AKUFFO: And so, Andy, how soon do you think we'll hit that $100 a barrel mark in terms of the domino effect when perhaps US consumers might start to feel the impact of that? How soon do you think that will happen?

ANDREW LIPOW: Well, I think these higher oil prices certainly prevent gasoline prices from continuing their seasonal drop during the winter. So I would argue that the consumer at the gas pump is already going to be seeing the impact over the next couple of weeks.

Also, we're going to see a greater impact on the diesel fuel price because that's really where the shortages are located. Inventories in the US are at their lowest level for this time of year since 1996. The European Union is about to phase in their ban on Russian refined product imports in February. And they're buying 700,000 to 900,000 barrels a day. And as diesel prices go up, the consumer is going to pay for it in the cost of goods and services that are delivered to their homes.

RACHELLE AKUFFO: Certainly putting more pressure on the Fed as they're trying to get inflation down as well. A big thank you, Andy Lipow, for joining us this afternoon.