IEEJ：December 2016○ｃ IEEJ 2016

Special Bulletin
A Japanese Perspective on the International Energy Landscape (303)

December 22, 2016

Crude Oil Price Trend after OPEC Conference and Key Points for Future Outlook
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Crude oil futures prices have been seesawing in a narrow range since topping $50 perbarrel after a ministerial conference of the Organization of the Petroleum Exporting Countries in lateNovember. The front-month West Texas Intermediate futures contract rose from $45.23/bbl on
November 29 to $51.79/bbl on December 5 in response to the OPEC production cut agreement at theconference. During the four-day winning streak, the key WTI futures contract posted an 18%
increase. It fell back slightly later and rose back to $52.98/bbl on the announcement of non-OPEC
oil producing countries’ agreement on their coordinated production cut (about 560,000 barrels perday). Since then, the WTI futures contract has remained around $51-52/bbl, closing at $52.49/bbl on
December 21.
Since the beginning of December, the WTI futures price remained in a range between alow of $49.77/bbl and a high of $52.98/bbl. Its rise has come to a temporary lull in a narrow range
just above $50/bbl. Basically, OPEC and non-OPEC production cut agreements have supported thebottom of the range, while skepticism about oil producing countries’ future compliance with theagreements and a forecast increase in U.S. shale oil production after the price hike have capped thehike.
The market has seen OPEC and non-OPEC coordinated production cuts as of significance.
Although caution must be exercised with regard to whether the production cut agreements could becomplied with as described later, the total production cut of 1.8 million bpd -- 1.2 million bpd for theOPEC agreement and 560,000 bpd for the non-OPEC agreement -- amounts to about 2% of global
supply and is significant if compared with the average global supply surplus of about 600,000 bpd in
the first three quarters of 2016. Moreover, OPEC achieved “surprise” agreements at its extraordinary
meeting in Algeria in September and its regular ministerial conference in November, exerting a great
impact on the market.
Behind the unexpected production cut agreements might have been oil producing
countries’ severe economic conditions under prolonged crude oil price weakness. Oil market
participants apparently believe that oil producing countries were thirsty for a production cut
agreement and tried to achieve such agreement with strong determination. More important is the factthat Saudi Arabia has served as effective coordinator of the agreements. It is noteworthy that theOPEC leader that has played the most important role as supply and demand coordinator in the1IEEJ：December 2016○ｃ IEEJ 2016

international oil market switched from its policy of maintaining its market share to a new policy oforchestrating a coordinated production cut agreement. The most important point in the future will be
how Saudi Arabia would respond when the coordinated production cut agreements are tested by themarket.
Meanwhile, skepticism about compliance with the coordinated production cut is a realistic
downward pressure factor for crude oil prices. As pointed out by many experts, Nigeria and Libya,
excepted from country-by-country quota of the OPEC coordinated production cut, have potential torecover and expand crude oil production depending on security improvements. Attention must be
paid to future production by Iraq and Iran on which production quotas have been imposed after theirsubstantial expansion of oil production. Given the past records, it is very uncertain whether Russia
would comply with the production cut agreement after pledging a 300,000 bpd production cut, thelargest among non-OPEC oil producing countries.
OPEC’s production target as from January is given at 32.5 million bpd. Given the above
skepticism, however, there is no guarantee that actual production would remain at or below the target.
If actual production exceeds the target and remains around 33 million bpd, the elimination of a
supply excess will make little progress in the first half of 2017. Depending on a U.S. shale oil
production increase or the emergence of world economic or political risks, oversupply could beprolonged. In this sense, whether oil producing countries will actually comply with the coordinatedproduction cut will attract market attention.
As another downward pressure factor for oil prices, the presence of U.S. shale oil is also
important. The number of operating U.S. oil-drilling rigs has already turned upward, indicating thatU.S. oil production is hitting bottom. Amid the weakness of oil prices since the second half of 2014,
the U.S. shale oil industry has streamlined itself and grown leaner by concentrating production atwells or regions with high productivity and cutting costs for the whole of supply chains. If crude oil
prices rise further after topping $50/bbl, U.S. shale oil production may be revitalized. Also
supporting U.S. shales oil production will be deregulation of shale oil and gas production anddevelopment, the promotion of supply infrastructure investment and the opening of federal oilconcessions under new President Donald Trump to be inaugurated in early 2017. Given a time lag,these policies may have no immediate effect on oil production. However, they may influence market
sentiment earlier.
In predicting the future market, we must also pay attention to how long the U.S. economy
will continue to be robust after the present Trump Rally, how negotiations will be made on theUnited Kingdom’s exit from the European Union, known as Brexit (whether Brexit would make ahard landing), and how China and other emerging economies would perform. Attention-attracting
political factors include the Trump administration’s foreign policy and its impacts, national elections
in major European countries and others that could affect world stability. These macro factors arevery important for predicting future crude oil prices.
2IEEJ：December 2016○ｃ IEEJ 2016

Undoubtedly, the international oil market will slowly go in the direction of rebalancing(the elimination of oversupply), although views are divided over the speed and degree of therebalancing. The abovementioned factors will greatly influence the speed and degree of therebalancing. For the immediate future, crude oil prices are likely to remain in a narrow range
between $50/bbl and $55/bbl. If OPEC and non-OPEC coordinated production cuts succeed inbuying time, crude oil prices may follow an upward trend in the market going in the direction ofrebalancing. In such case, crude oil prices may rise to a $55-60/bbl range in the second half or at theend of 2017. However, various factors are working to influence crude oil prices. Given that it willremain difficult to forecast the future market, I would like to remain alert to future developments.

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