Summer gas prices are headed even lower, as Saudi Arabia accepts the 'lesser evil' of cheap oil

Business Insider

07-07-2025

Gas prices at the pump could get even cheaper just as Americans hit the highways for summer travel.
Over the weekend, OPEC+ jolted markets by announcing it would flood the market with even more oil. Eight producers, including heavyweights Saudi Arabia and Russia, plan to ramp up output by 548,000 barrels a day in August — handily beating the 411,000-barrel increase analysts were expecting.
The move sent oil prices tumbling on Monday, a sharp contrast to the surge in prices last month caused by heightened Middle East tensions.
US benchmark West Texas Intermediate crude oil futures were 1.4% lower at $66.05 a barrel at 12:08 a.m. ET, while international Brent crude futures were 0.7% lower at $67.83 a barrel.
The price slump lands right as peak summer season kicks in, with millions of Americans hitting the road, and when demand for air conditioning soars.
Gas averaged $3.16 a gallon in the US on June 30, down 11% from the same time last year, according to the Energy Information Administration. About half the cost of a gallon of gas comes from crude oil.
A $1-per-barrel drop in the price of crude oil would translate into a decline 2.4 cents per gallon of gas, according to the EIA.
Lower oil prices are the 'lesser evil'
OPEC+ said it's lifting output thanks to "a steady global economic outlook and current healthy market fundamentals, as reflected in the low oil inventories."
But analysts see something bigger at play. The output ramp-up is widely viewed as a bid by the oil cartel to claw back market share in the face of stiff competition from US shale and tepid demand from a prolonged slowdown in China.
De facto OPEC leader Saudi Arabia, in particular, appears willing to stomach lower oil prices to preserve its dominance. This stance comes even as the International Monetary Fund estimates Saudi Arabia needs oil prices to be over $90 a barrel to balance its budget.
But "softer oil prices may be the 'lesser evil' for Saudi, OPEC+, and arguably for the global economy, all things considered," Vishnu Varathan, Mizuho's head of macro research excluding Japan, wrote in a Monday note.
Lower prices may help Saudi Arabia reclaim lost market share, score political points by answering President Donald Trump's calls for cheaper oil, and cement Riyadh's influence within OPEC and the broader Middle East.
"To that end, softer prices in the interim is a palatable enough (albeit a tad bitter) trade-off, that is facilitated by inherent advantage of comparatively lower cost of production," Varathan added.
Saudi Arabia's strategy for OPEC+ could keep a lid on prices for a while.
Analysts at Goldman Sachs expect another production boost of 550,000 barrels a day of oil for September. The bank is keeping its Brent forecast of $59 per barrel average in the fourth quarter of 2025 and $56 a barrel in 2026.
Commodity strategists at ING wrote that oil supply would tip into surplus should OPEC+ boost production by the same amount in September.
"This supports the view that there's further downside for oil prices," the ING strategists wrote.