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December 2, 2016

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OPEC cuts to have modest impact

OPEC’S decision to cut production gave an immediate boost to oil prices, but the impact on consumers and the US economy is likely to be more modest and gradual.

The cartel agreed on Wednesday to cut output by 1.2 million barrels a day, reversing a strategy that produced lower oil prices and pain for US drillers but saved money for consumers.

Even if the Organization of the Petroleum Exporting Countries members carry through on their promises, global oil production would only fall by about 1 percent. There is still more supply than demand — the reason oil prices collapsed beginning in mid-2014.

The price of oil shot up 9 percent to near US$50 a barrel. If the price keeps rising, some of the slack from OPEC cuts will be picked up by producers in the US — good news for drillers and oilfield workers in Texas and North Dakota. President-elect Donald Trump has vowed to increase drilling in the US, the world’s third-largest producer after Saudi Arabia and Russia, which would help ensure there is plenty of oil.

In short, analysts say, consumers and businesses are not likely to see the return of US$100-a-barrel oil — and the high energy costs that came with it — anytime soon.

Still, there could be some short-term shocks even before OPEC’s cuts take effect in January.

“The average Joe filling up his tank may notice in the next week or two that gas prices move higher by 5-15 cents a gallon just on the psyche of the deal,” said Patrick DeHaan, an analyst for GasBuddy, a site used to comparison-shop for gasoline.

The US Energy Department predicts that heating oil costs will rise about a third this winter, but that prediction was issued more than a month ago and was based heavily on forecasts of much colder temperatures in the Northeast. If the weather forecast proves wrong, prices could sink because heating-oil inventories are running above their five-year average and grew again last week.

A small increase in gasoline or even a bigger jump in heating oil, which is used in only 5 percent of American homes, won’t affect shoppers if the economy does well, in the view of Michael Niemira, chief economist at The Retail Economist LLC, which does a weekly retail sales report with Goldman Sachs.

“The consumer isn’t really focused on gasoline since prices remain low. A better economy, a better labor market — those matter much more,” Niemira said. But if gasoline spikes to US$4, “that could be bad.”

Crude has traded between US$40 and US$50 a barrel the last several months. The national average for gasoline on Wednesday stood at US$2.15 a gallon in the US, according to the AAA auto club.

Before the OPEC meeting, the US Energy Department predicted that crude would rise to US$50 or US$51 a barrel next year.

Sal Guatieri, senior economist at BMO Capital Markets, said modestly higher oil prices will actually help the US economy by spurring investment in the energy industry without draining consumers’ purchasing power. He expects an average price of about US$53 a barrel next year as a result of the OPEC production cuts.

“The losers are Europe and Japan — oil-importing regions of the world,” Guatieri said.


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