OPEC extends production cuts for 9 months to increase oil prices: NPR

Journalists interview the oil minister on the sidelines at the 176 conference in the organization of the Petroleum Exporting Conference on Monday in Vienna, Austria.

Joe Klamar / AFP / Getty Images

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Joe Klamar / AFP / Getty Images

Journalists interviewing oil minister on the sidelines of the 176 conference in the organization of the Petroleum Exporting Conference Monday in Vienna, Austria.

Joe Klamar / AFP / Getty Images

Updated at 5:10 pm ET

OPEC and other allied major oil producers have agreed to expand production cuts for another nine months, in a move to keep oil prices falling as US production increases and concerns grow over global demand.

Crude oil prices rose following an early announcement of OPEC's decision. However, prices are not expected to increase dramatically as countries that do not cooperate with OPEC – such as the United States – have enough capacity to meet expected growth in demand.

OPEC's supply cuts, as Russia and several other non-member countries also observe, were temporarily introduced at the beginning of 2017. They are credited by helping to stop a dramatic multi-year slide in oil prices, and OPEC has chosen to expand cuts several times. since then.

Before Monday's meeting, the organization was expected to extend cuts by at least six months.

The agreement must be technically approved by participating non-OPEC members at a meeting on Tuesday.

But Russia, arguably the most important non-OPEC partner, has already suggested that it is willing to cooperate with production cuts.

Changing geopolitics

Some of OPEC's production decline is beyond the control of the cartel.

Iran, a founder of OPEC, is under pressure from US sanctions after President Trump withdrew from the nuclear nucleus of Iran. As a result, Iran has struggled to export its crude oil.

Venezuela, another OPEC member, has also been hit by US oil sanctions, further contributing to the reduction of OPEC production.

Broadly speaking, the agreement is to keep cuts in place for a period of intense geopolitical tension.

Iran continues to protest strongly against the regional rival Saudi Arabia's influence over OPEC decisions, especially as an alliance between Saudi Arabia and Russia is holding increasing swings across the cartel.

Since these production cuts were agreed at the end of 2016, non-OPEC members such as Russia have strengthened the organization's ability to influence the global oil market. While OPEC controls less than 50 percent of world crude oil production, the extended coalition, known as "OPEC +", controls a majority.

Russia, although not an OPEC member, therefore has a significant margin over OPEC decisions. In fact, the Monday meeting, originally scheduled for late June, was redirected to Russian request – creating a controversy within OPEC's actual membership.

On Monday's meeting, OPEC agreed to formally recognize the new relationship with these non-OPEC allies through a "Charter of Cooperation." The charter must now be approved by Russia and the other OPEC + members.

Khalid al-Falih, Saudi Arabia's energy minister, called the charter a "historical document".

"We permanently bring a group of manufacturers into a larger fence … to work together as a larger family," he said.

Iran had promised to veto the charter, given its concerns over the power used by Saudi Arabia and Russia. But after long negotiations, it finally approved the document, which al-Falih said contained assurances that the new charter would not replace the original OPEC agreement.

Meanwhile, the US – demand not a member of OPEC – has increased oil production on a fast cut. The boom in the Permian Basin has made the USA the world's best oil producer.

When OPEC countries reduce production, it increases both the members and the non-members' assets. But it also provides a larger part of the market available to others. So when OPEC + restricts production, it distributes US producers, regardless of whether they help the US demand a growing share of the global oil market.

Eying future demand

Concerns about growing US production are not the only incentive for OPEC + production cuts. The cartel and its allies are also concerned about softening demand growth.

Only last year, OPEC announced that it lowers expectations of future world oil demand.

The International Energy Agency, or IEA, projects also soften the demand growth. The IEA says there are several factors, including "a warm winter in Japan, a decline in petrochemical industry in Europe, and weak gasoline and diesel demand in the United States."

But a factor wears itself all over the world, says IEA: Concerns about the future of global trade.

Economists expect the world economy to decline over the coming months and years. And the excitement between the United States and China – including trade war – has raised concerns about economic chilling.

In the long run, changes in transport – especially the increase in electric vehicles – and government policies designed to reduce the severity of global climate change will put pressure on demand for oil.

However, analysts believe that the demand for oil has not peaked. While demand growth may slow down, global oil appetite continues – only in slower than OPEC, and the IEA had previously expected.

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