IEEJ：December 2015

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Special Bulletin
A Japanese Perspective on the International Energy Landscape (248)

December 4, 2015

Coexistence of Substantial Middle Eastern Confusion and Low Oil PricesKen Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn December 2, the benchmark West Texas Intermediate oil futures slipped below $40 perbarrel to $39.94/bbl, the lowest since August 26. The key WTI futures, which rose back above$41/bbl the next day, has remained low below $43/bbl since early November. Behind the slack oilprices have been a sense of oversupply overshadowing the market and an inventory increase as anobserved oversupply, as well as future negative factors such as the effects of Iranian crude oil’s
expected comeback to the international oil market and a possible U.S. interest rate hike, etc.
When looking at the overall international situation apart from crude oil market
supply-demand fundamentals, however, we see important security and geopolitical events that could
shake the world and boost oil prices. On November 13, terrorist attacks in Paris left more than 130
people dead. France declared a state of emergency, making counterterrorism and security thegovernment’s top priority. In response to the terrorist attacks, France expanded bombing on theSyrian city of Raqqa, known as a base for the Islamic State group that claimed responsibility for theParis attacks. Europe-wide efforts came to enhance cooperation in fighting against terrorism and theIS group. The United Kingdom launched bombing on IS militants in Syria, after acquiring
parliamentary approval on December 2.
The background for these developments includes the confused Syrian and Iraqi situations
and IS militants’ operations throughout these countries. Even before the Paris terrorist attacks,
multinational forces led by the United States had implemented and enhanced bombing on IS
strongholds. They had fallen short of containing IS militants while Syrian government forces and IS
militants continued a back-and-forth ground battle. On September 30, Russia launched Syrian
bombing, joining the fight against IS terrorists. But Western countries claimed that Russia’s bombing
targets included non-IS rebels confronting Syrian President Bashar Assad, indicating a complicatedsituation in which Western countries were not necessarily united with Russia to fight againstterrorism. On November 1 after Russia participated in bombing Syria, a Russian airliner crashedfollowing its departure from Sharm el-Sheikh International Airport in Egypt, killing 224 passengers
and crew members. The Russian government attributed the crash to a terrorist attack on November
17 and expanded retaliatory bombing on Syria.

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In an event that complicated the situation further, Turkey shot down a Russian militaryaircraft. On November 24, Turkish Air Force fighters shot down the Russian bomber, alleging that
the Russian military aircraft intruded into Turkish airspace. Turkey claimed that the Russian bomber
violated Turkish airspace and that the Turkish fighters gave warnings before shooting down theRussian military aircraft. But Russia denied the Turkish claim, leading to rapid escalation of theirtensions. Russia on November 28 imposed economic sanctions on Turkey, including a trade embargoon certain products (including farm products) and restrictions on traveling. Russia escalated its
criticism of Turkey, asserting that Turkish President Tayyip Erdogan and his relatives weresmuggling oil from the IS. President Erdogan immediately denied the smuggling and vowed toresign if his alleged smuggling is proven. The blaming game between Russia and Turkey could leadto greater tensions between Western countries and Russia, bringing a very complex factor into whatshould be concerted efforts to address terrorism, IS and Syrian problems.
As the Syrian and Iraqi situations are confused amid continued bombing on IS strongholds,
relations are growing more complicated among Western countries, Russia, Turkey and Middle
Eastern countries including Persian Gulf nations like Saudi Arabia and Iran. As Syrian and Iraqi
problems remain unsolved and are deteriorating, massive refugees from these countries are flowing
into Europe. Hundreds of thousands of refugees have flowed into Europe so far this year. Even inGermany that has positively accepted refugees from the humanitarian viewpoint, the massive
refugee inflow has become a great social problem. Furthermore, security concerns are growing inregard to the acceptance of refugees as participants in the terrorist attacks in Paris included people
who flowed into France as refugees. The confused Middle Eastern situation has caused serious
security problems in the whole of Europe including Turkey.
Usually, it would not be strange for the emergence and spread of such grave or serious
geopolitical risks and international tensions involving the Middle East as the gravity center of global
oil supply to exert influences on the crude oil market as a price-boosting factor. In fact, however,these geopolitical risks or international tensions have had no significant effects on oil supply from
the Middle East. A persuasive explanation would be that such risks or tensions may have no effect on
crude oil prices unless they affect oil supply. But price predictions on the futures market are always
sensitive to market psychology or speculations. Rather, I think that the current sense of oversupply is
too strong to be affected by geopolitical risks in the Middle East. This means that geopolitical risks
in the Middle East that do not have real adverse effects on oil supply cannot become market-moving
factors in the current market environment. Serious tensions and geopolitical risks in the Middle East
can coexist with low crude oil prices in such environment.
What factors would change the current situation? First, a fading sense of oversupply in theinternational oil market could change the situation. While oversupply is expected to remain for theimmediate future, some people note that supply and demand are being rebalanced. As the Middle
Eastern confusion is expected to remain over a long term, we may have to pay attention to the future
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oil supply and demand environment. Another factor may be that Middle Eastern geopolitical risks
would exert real adverse effects on oil supply, although such factor is not seen now. It may bedifficult to predict how and when these risks would begin to affect oil supply. But we cannot
necessarily expect that these risks will have no influence on the market as in the past. At a time whengeopolitical risks and international tensions in the Middle East are complicated, how Saudi Arabiaand Iran that hold the key to oil supply and policy in the Middle East would develop their relations
would also be significant for analyzing the future Middle Eastern situation and oil problems. We
may have to pay close attention to such development.

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