IEEJ：June 2017○ｃIEEJ 2017
Special Bulletin
A Japanese Perspective on the International Energy Landscape (326)June 2, 2017

WTI Futures Averaged $51/bbl in January-May, Staying between $50-55/bbl inMajority of Trading Days
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
From January through May, daily closing levels of the front-month West Texas
Intermediate crude oil futures contract averaged $50.97 per barrel, ranging from the lowest at$45.52/bbl (on May 4) to the highest at $54.45/bbl (on February 23). On more than 60% of the 103
trading days in the period, the benchmark crude oil futures price moved roughly within a $50-55/bbl
range. Since late April, however, it stood at levels below $50/bbl. Meanwhile, daily closing levels of
the front-month Brent futures contract averaged $53.75/bbl and ranged from $48.38/bbl to$57.10/bbl in the period, moving primarily in the $50-55/bbl range as well.
Factors behind the benchmark WTI futures price’s recent slip below $50/bbl are discussed
later. The five-month period featured specific factors for the ceiling and floor of the range.
Supporting the floor has been a coordinated oil production cut agreed finally at a general meeting of
the Organization of the Petroleum Exporting Countries in November 2016 following the discussion
among the oil producers to cut production from the middle of the year. The coordinated production
cut, in which Russia and other non-OPEC oil producing countries agreed to participate, totaled about
1.8 million barrels per day, including 1.2 million bpd for OPEC. Since January when the coordinatedproduction cut started, OPEC’s rate of compliance with the production cut has remained close to100%.
While country-by-country rates of compliance with the production cut were patchy, OPECleader Saudi Arabia implemented a substantial cut to achieve the high compliance rate for the wholeof OPEC. The market has appreciated the high compliance rate as indicating the seriousness ofOPEC and its leader Saudi Arabia about the production control. This has been a major factor
supporting the floor of the oil price range.
Meanwhile, there have been two factors to cap oil prices at the ceiling. The first factor isoversupply symbolized by high inventory levels. The coordinated production cut has been officiallyaimed at restoring a normal inventory level. In the actual market, however, inventory reduction has
failed to make progress. Inventories have remained at historically high levels, in particular in private
sector inventories at more than 3 billion barrels in the member countries of the Organization for
Economic Cooperation and Development. Market participants may apparently share the recognition
that the high inventory levels have capped crude oil prices.
1IEEJ：June 2017○ｃIEEJ 2017The second factor is the expansion of supply including rising U.S. shale oil production.
When crude oil prices began to plunge in 2014, Saudi Arabia adopted a policy of leaving the market
to decide crude oil price without cutting production to defend oil prices. Then, Saudi Arabia might
have expected that U.S. shale and other high-cost crude oil would exit from the market as prices
decline. Actually, U.S. crude oil production including shale oil declined in 2016 in response to therapid crude oil price plunge. At the same time, however, U.S. shale oil producers thoroughly
streamlined or rationalized their operations to lower their production costs. The average shale oilproduction costs have declined to around $40/bbl, according to the International Energy Agency.
Market participants have increasingly conceived that shale oil producers can maintain or moderately
expand production even at the present crude oil price levels and could promptly expand production
in response to further price hikes. In fact, U.S. crude oil production increased by more than 800,000
bpd from October to the present. The production expansion has worked to cap crude oil prices at theceiling.
In this way, crude oil prices have roughly remained in a boxed range between $50/bbl at
the floor and $55/bbl at the ceiling. However, market conditions can always change to lower prices
below the floor or push up them above the ceiling. At present, market forces are lowering crude oil
prices below the floor. Market participants now conceive that market sentiment is not necessarilystrong at present. The high crude oil inventories and the shale oil production expansion have
gradually enhanced downward pressure on crude oil prices. The pressure has shaken OPEC andother oil producing countries since late April, forcing them to agonize over whether to extend thecoordinated production cut planned for six months from the beginning of this year and whether tochange the cut upon the extension.
In response to the market pressure, OPEC eventually decided to extend the coordinatedproduction cut for nine months at its 172nd general meeting on May 25. If OPEC failed to extend theproduction cut, crude oil prices could have plunged. To avoid the worst development, OPEC had nochoice but to extend the production cut. The extension had been well expected earlier. In this sense,
the latest OPEC decision included no surprise. The crude oil price trend after the decision indicatesthat the market has not been satisfied with the decision that failed to expand the production cut while
extending it for nine months.
On the other hand, OPEC might have adopted a time-buying strategy by extending theproduction cut in a bid to wait and see future developments. While global oil demand indicates asteady increase of 1.3 million bpd, a shale oil production expansion is countered by a stagnation ordecline in other non-OPEC production. In such circumstances, OPEC may expect that the market
will gradually go in the direction of rebalancing if it continues to control production through thecoordinated production cut. It may not be strange for oil producing countries to have chosen to buytime with the extension of the coordinated production cut until rebalancing becomes clearer.
Through the second half of this year, whether crude oil prices will remain in a boxed rangeand what level the ceiling or floor of the range will be will attract much attention. As noted above,
market conditions can always change. While the shale oil production trend and oil producing
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IEEJ：June 2017○ｃIEEJ 2017
countries’ coordinated production cut as described above are expected to remain key factors, there
are many other attention-attracting factors including the world economy and oil demand trends,
geopolitical risks and their effects on oil supply. Given that crude oil prices are likely to makevarious new developments, with new pressure emerging, in response to market changes, we will
have to keep close watch on the future trend.

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