IEEJ：October 2016ｃ○ IEEJ 2016

Special Bulletin
A Japanese Perspective on the International Energy Landscape (290)September 23, 2016

Attention-attracting Conclusion at Oil Producing Countries’ Meeting
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
From September 26 through 28, the International Energy Forum will hold its 15th
ministerial meeting in the Algerian capital of Algiers. The IEF, designed for promoting dialogue
between oil producing and consuming countries, opened its first meeting in Paris in 1991 and has
held a meeting every two years since the fifth meeting in 1996. The coming meeting follows theMoscow gathering in May 2014. It will be the first IEF meeting for new IEF Secretary General Dr.
Sun Xiansheng, who took the post in August after serving as president of China National Petroleum
Corporation (CNPC) Economics & Technology Research Institute.
The IEF meeting is attracting attention as numerous ministers and top energy company
executives from oil producing and consuming counties are set to attend it to discuss the present
situation and challenges for the international oil market. However, there will be a relevant event thatis attracting more attention. It is an unofficial meeting of the Organization of the Petroleum
Exporting Countries (OPEC) and non-OPEC oil producing countries such as Russia. Oil market
players throughout the world are paying attention to whether major oil producing countries could
agree on some production adjustment to address weak oil prices at the unofficial meeting.
As noted in my earlier report (A Japanese Perspective on the International Energy
Landscape (285)), the unofficial meeting of oil producing countries timed to coincide with the IEF
meeting in late September was announced on August 8 after the key WTI (West Texas Intermediate)crude futures price slipped below $40 per barrel. In response to the announcement, the key Brent
crude futures contract rose above $50/bbl briefly within August. However, the upward momentum
failed to be sustained. The Brent price has been hovering around $45/bbl since the middle ofSeptember. Behind the oil price trend is a growing view that a glut has remained in the internationaloil market and would take more time to be eliminated than earlier expected. According to latest datafrom the International Energy Agency, private sector oil inventories in the member countries of theOrganization for Economic Cooperation stood at a historically high level exceeding 3.1 billion
barrels in July. While oil demand is growing at a steady pace of 1.2 million barrels per day, supply isabundant with OPEC crude oil output increasing close to 33.50 million bpd in August to more thanoffset a production cut in non-OPEC oil producing countries.

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IEEJ：October 2016ｃ
○ IEEJ 2016

As crude oil prices plunged substantially from more than $100/bbl, U.S. crude oil output
declined year on year in 2016 even amid steady demand growth, leading non-OPEC output to turndown. As a result, the international oil market is going in the direction of rebalancing, or theelimination of the glut. Under the present supply and demand environment, however, a growing viewis that rebalancing will take more time than earlier expected to delay tightening of thesupply-demand balance until the second half of 2017. Therefore, the unofficial meeting of oil
producing countries is attracting attention as a factor that could change the supply and demandsituation and the crude oil price trend. However, most experts in the world are negative or doubtful
about any impactful decision to be made at the unofficial meeting.
A fundamental reason for the dominant view among experts is that they see it as difficult
for major oil producing countries to agree not only on full-fledged production cuts but also on afreeze on production increases. Major oil producing countries failed to reach any agreement on thefreeze on production increases at their meeting in Doha last April before the coming meeting. Iranwilling to increase oil production following the termination of Western sanctions differed with Saudi
Arabia, which argued that any agreement to freeze production increases without Iran’s participation
would be meaningless. Five months after the Doha meeting, Iran’s output has risen back to morethan 3.6 million bpd close to the pre-sanction level. However, Iran has reportedly tried to boost
output to more than 4 million bpd. Iran has also been ambitious to expand oil production byintroducing new contracts with foreign companies from a medium-term point of view. Irrespective ofwhether Iran can expand oil output to 4 million bpd, market players believe that it would be difficult
for Iran to accept a freeze on production increases at present.
There are some other oil producing countries that could be reluctant to accept the freeze.
Libya and Nigeria have reduced production due to domestic destabilization. Given that they have thepotential to expand production if their situations are stabilized, they may not be in position to easily
accept the freeze. In such situation, Saudi Arabia, which has conditioned the production freeze
agreement on participation by all major oil producing countries, is seen as unlikely to lead theagreement. Given its bitter experiences in the 1980s, Saudi Arabia is unlikely to accept a situation inwhich Saudi Arabia alone is responsible for adjusting production as other major oil producing
countries fail to participate in the adjustment or refrain from adjusting production while nominallyparticipating in the adjustment. The present oil price weakness, though causing major economic andfiscal problems in oil producing countries, has successfully prevented shale and other high-cost
crude oil from expanding their global market shares, as indicated by a stop in U.S. shale oil
production growth and a subsequent decline in production. In this sense, Saudi Arabia might havemade no change to its stance.
Given the above, a dominant view at present is that oil producing countries are unlikely toannounce an effectively significant agreement at their coming unofficial meeting. If the meeting
sends a message that oil producing countries would not take any effective action even under the2

IEEJ：October 2016ｃ○ IEEJ 2016

current supply and demand environment, downside pressure may be exerted on oil prices. At least,
such message separated from other factors may be interpreted as a factor to prolong the oil priceweakness. If some action regarding production adjustment is agreed on for some reasons, however, it
may become a kind of surprise for the market, working to boost oil prices at least over a short term.
Later, market players may focus on whether the action could be implemented and what the impact of
the implementation could be like. Given the historically high OPEC production level, the impact of asimple agreement to freeze production increases could not be estimated. In this sense, we will haveto closely watch the results of discussions at the unofficial meeting and later developments.

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