The OPEC+, a group formed by the organization and its allies, announced it will extend the crude production cuts for nine months. The measure is meant to prevent an oil price drop as U.S. crude production continues to increase and concern over global demand grows.
Prices went up following the first reports of the OPEC+ decision. However, they are not expected to rise dramatically, since countries not cooperating with the organization have the capacity to meet the forecasted growth in demand.
Members of the press at the Joint Press Conference pic.twitter.com/weKWYKJSPt
— OPEC (@OPECSecretariat) July 2, 2019
Waiting for the allies
Prior to Monday’s meeting, the organization was expected to extend the production cuts for at least six months.
Although it was announced that the OPEC+ was planning to extend the cuts, the agreement must technically be approved by non-OPEC producers on Tuesday’s meeting.
Russia has indicated its willingness to cooperate with the production cuts.
Some production cuts are actually out of the organization’s control.
Iran, an OPEC founding member, is under pressure due to the U.S. sanctions imposed after President Donald Trump withdrew from the nuclear pact with this nation.
Venezuela, another cartel member, has also been affected by U.S. sanctions.
These punitive measures further contribute to reducing the OPEC’s output.
Great discussion today with H.H. Sheikh Mohammed bin Zayed Al Nahyan in Abu Dhabi on the need to promote freedom of navigation in the Strait of Hormuz and to work together to counter #Iran’s malign activity. pic.twitter.com/Vhgq7lMIEr
— Secretary Pompeo (@SecPompeo) June 24, 2019
In spite of not being an OPEC member, Russia has great influence on the organization’s decisions. In fact, Monday’s meeting, originally scheduled for late June, was postponed by petition of Russia, which generated certain controversy among current OPEC members.
At the reunion, the OPEC agreed to formally recognize the new relationship with non-member producers through a cooperation pact. The pact must now be approved by Russia and other OPEC+ nations.
— President of Russia (@KremlinRussia_E) July 2, 2019
Since these production cuts were approved in late 2016, non-OPEC producers like Russia have strengthened the organization’s capacity to influence the global oil market.
While the OPEC controls less than 50% of global crude production, the OPEC+ coalition controls most of it.
The role of the United States
Meanwhile, the United States, an outside producer, has ramped up oil production at a rapid pace after becoming a major oil producer thanks to the rise of the Permian basin.
When OPEC members lower production, it benefits members and non-members alike. However, it also leaves a large portion of the market available for others. Hence, when the OPEC+ curbs output, it benefits U.S. producers, who it involuntarily helps take a part of the growing global market.
Concerns over the rise of U.S. production are not the only reason behind the OPEC+ cuts. The cartel and its allies are also concerned about the deceleration of demand.
Last month, the OPEC announced it would downgrade crude demand outlook.
The International Energy Agency also expects the pace of oil demand growth will slow down. According to the IEA, there are multiple factors including “a warm winter in Japan, the deceleration of the Chemical industry in Europe, and modest gasoline and diesel demand in the United States.”
In 2018, the global average price of gasoline was 0.97$ per litre, a 1️⃣4️⃣% increase compared to the previous year.
Our just-updated World Energy Prices database has annual energy prices data for more than 100 countries 👇 https://t.co/Qkvta4GuTu
— IEA (@IEA) July 1, 2019
Economists expect global economy to decelerate over the next months and years. Tensions between the United States and China, among other trade wars, have increased concerns over an economic slowdown.
In the meantime, changes in the transportation industry, in particular the transition to electric vehicles, and government policies designed to combat climate change could lower oil demand in the long-term.
Nonetheless, analysts believe that oil demand has not reached its peak. While the demand growth could be slowing down, the world’s appetite for oil continues to increase, just a slower pace than the IEA had anticipated.
With the news that the OPEC+ is set to extend the production cuts, analysts are waiting for the impact that the measure could have on prices and the organization’s influence on the global market.
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