IEEJ：October 2017○ｃIEEJ 2017
Special Bulletin
A Japanese Perspective on the International Energy Landscape (344)

October 6, 2017

January-September 2017 Prices Average $53/bbl for Brent, $49/bbl for WTI
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Crude oil futures prices (front-month contracts’ daily closing prices) in the first ninemonths of 2017 averaged $52.5 per barrel for Brent and $49.4/bbl for West Texas Intermediate.
Crude oil prices remained above $100 for about three and a half years from 2011 to the first half of2014 and have stayed around half the level since 2015. In the January-September 2017 period, prices
peaked at $59.02/bbl for Brent on September 25 and at $54.45/bbl for WTI on February 23 andbottomed out at $44.82/bbl for Brent and $42.50/bbl for WTI on June 21. They fluctuated roughly
within a narrow range of the averages plus or minus $10/bbl.
In the first quarter of 2017, crude oil prices stayed mainly in a $50-55/bbl range, supported
by a coordinated production cut by the Organization of the Petroleum Exporting Countries and somenon-OPEC oil producing countries including Russia. As crude oil prices remained above $50/bbl,
however, U.S. shale oil production expanded, leading concerns about oversupply to linger despite
these oil producing countries’ stricter-than-expected compliance with the coordinated production cut.
As a result, downward pressure on crude oil prices grew in the second quarter. In the face of thepressure, OPEC and other oil producing countries decided in May to extend the coordinatedproduction cut for nine months until March 2018. However, the downward trend continued, withprices hitting this year’s lows in June.
As crude oil prices slipped below $45/bbl, however, market players speculated that U.S.
shale oil production growth could decelerate. Actually, the number of U.S. operating oil-drilling rigs
and production began to be affected, supporting oil prices. In the third quarter, the WTI futures rose
gradually from levels below $45/bbl close to $50/bbl and topped $50/bbl in September. Then, global
crude oil inventories began to slowly decrease, leading to expectations of rebalancing (theelimination of oversupply). As a result, crude oil prices rose toward the second half of September.
Brent topped $59/bbl on September 25, testing the $60/bbl for the first time since July 2015. Given
that price hikes could encourage U.S. shale oil production, however, oil prices became top-heavy.
Later, crude oil prices seesawed in a narrow range above $50/bbl.
In this way, the crude oil price trend in 2017 has been closely linked to U.S. shale oilproduction. This means that the shale oil production trend and market players’ interpretation of thetrend have become a major factor to set the ceiling and bottom of a crude oil price range. At present,
the WTI price can be interpreted as staying in a boxed range of $50/bbl plus or minus $5/bbl. I
suspect that this trend would be rather structurally robust and will continue until the end of this year.
Eventually, WTI prices could average about $50/bbl this year. Behind the current international oil1

IEEJ：October 2017○ｃIEEJ 2017
market, however, various moves and changes have been emerging.
First, oil inventories in the member countries of the Organization for Economic
Cooperation and Development have been decreasing, though at a very slow speed, indicating thatrebalancing has made gradual progress. This week, I had an opportunity to exchange opinions withoil market analysts in major oil producing countries. One of the major topics was the pace ofrebalancing. Current crude oil price levels are exerting steady influences on oil supply and demand
at a pace that is slower than expected due to U.S. shale oil’s enhanced resistance to low oil prices.
While global oil demand continues growing firmly, oversupply is gradually shrinking due to falling
oil production by non-OPEC oil producing countries other than the United States and thecoordinated production cut continued by OPEC and some other oil producing countries, despite theU.S. oil production expansion. The international oil market is expected by some people to go in thedirection of a supply-demand equilibrium in the first half of 2018. Depending on the direction, crude
oil prices may show new moves.
Then, we may have to pay much attention to the future U.S. shale oil production trend as afactor exerting the largest impact on future oil supply and demand trends and prices. While shale oil
has enhanced resistance to low oil prices through remarkable growth in productivity under the weak
oil market, some people point to decelerating improvement in productivity and financing problems
for shale oil production companies. In this respect, we will have to closely watch future trends.
There are many other attention-attracting points including the world economy trend, oil demand in
emerging countries, geopolitical risks in major oil producing countries and their effects on oil supply,
and the trends of financial markets and market players and their effects on crude oil prices.
However, the second biggest attention-attracting point after U.S. shale oil will be what thenext action by OPEC or its leader Saudi Arabia would be. Through discussions with theabovementioned analysts from oil producing countries, I felt anew that the significance of thecurrent coordinated production cut implemented since the beginning of this year by oil producing
countries is not small. The coordinated production cut by oil producing countries (and theirstricter-than-expected compliance with production quotas) led crude oil prices to rise back above$50/bbl. The production cut has had a visible effect on oil prices. In the absence of such coordinatedoil production cut, the international oil market in 2017 could have been plagued with unprecedented
oversupply, with oil inventories increasing substantially instead of decreasing. Crude oil prices could
have declined to the lowest levels since the January-February 2016 period.
The coordinated production cut by OPEC and other oil producing countries has so far
produced some effects. However, uncertainties about its future effects have begun to linger. As low
prices are prolonged, incentives may easily work for some oil producing countries to expand oil
production to secure and increase oil revenues. The rate of their compliance with the production cut
may decline. As countries exempted from production quotas expand production to affect the market,
the economic burden on a swing producer that tries to absorb such expansion may increase more andmore.
Options that OPEC or its leader Saudi Arabia could adopt in such circumstances may2

IEEJ：October 2017○ｃIEEJ 2017
include (1) maintaining and enhancing the present coordinated production cut and urging all
participants in the coordinated cut to comply with their respective production quotas and (2) serving
effectively as a swing producer to cover most of the overall production cut. Another possible option
may be (3) repealing the coordinated production cut and restoring a market share-maintaining
strategy if some participants go ahead of others in expanding production or take free ride on others’
production cuts amid expectations that some may fail to comply with their production quotas. All
these options would be painful for OPEC and its leader Saudi Arabia and difficult for them to adopt.
Whether the market will go in the direction of rebalancing as expected will attract much attention
along with policy decisions at the next OPEC meeting.

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