IEEJ：August 2015

ｃ○ IEEJ 2015

Special Bulletin

A Japanese Perspective on the International Energy Landscape (231)

August 4, 2015

Brent Falls below $50/bbl for the 1st Time in 6 Months
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan

On August 3, the benchmark Brent crude oil futures price dropped by $2.69 per barrel
from the previous day to $49.52/bbl, slipping below $50/bbl for the first time in some six months,
since January 29. The West Texas Intermediate crude futures price also fell by $1.95/bbl to afour-month low of $45.17/bbl.

Crude oil prices have gradually decreased since early July. The WTI price declined below$50/bbl on July 22 before the Brent price did so. Both crude oil prices hit lows below the $50/bbl
early this year before rebounding on a fast decline in U.S. oil drilling operations, a relevant
slowdown in shale oil production growth and a prediction of slack production in the future. From
May to June, Brent rallied to a $65-67/bbl range and WTI to a $60-61/bbl range. From these levels,both Brent and WTI have dropped back to less than $50/bbl. What are the factors behind the latest
fall?

First, it is important that the market still sees a substantial oversupply. The United Statesand other oil producing countries outside the Organization of the Petroleum Exporting Countries
have slowed their oil production growth. But their production is still growing. OPEC has kept its
output far above 31 million barrels per day. If the current conditions remain unchanged, theinternational oil market is expected to see a supply surplus of far more than 1 million bpd in the thirdand fourth quarters of this year. The current loose supply-demand balance is a basic factor behind therecent oil price fallback.

Second, price lowering factors have emerged one after another. On the demand side, theGreek debt problem and China's economic growth slowdown have retained downward pressure on
the international oil market. The Greek debt problem has nominally calmed down as the European
Union has decided to continue aid to Greece. But market fears are still lingering. When the Athens
Stock Exchange resumed trading on August 3 for the first time in five weeks, stock prices plunged
16%, indicating that no optimism can be justified for the future. How the Greek problem would spillover to Europe or the whole of the world is still uncertain.
1

IEEJ：August 2015ｃ
○ IEEJ 2015

Under such situation, a fear of China's economic growth slowdown has been growing as
noted in my previous special bulletin on "A Japanese Perspective on the International Energy
Landscape." China is far more important for the world economy than Greece. Because of its great
presence in oil and other commodities markets, the China factor exerts great influences on thesemarkets. A preliminary Purchasing Manager Index announced by Chinese media group Gaixin in
July declined from the previous month to 47.8, slipping below the boom-or-bust dividing line of 50
for the fifth straight month. The latest sign of China's economic growth slowdown might havestimulated selling in the crude oil market. In this way, the oil market has been reacting nervously toeconomic developments in China.

On the supply side, U.S. shale oil production's stronger-than-expected resistance to low oilprices has begun to affect market sentiments. As mentioned above, when crude oil prices bottomedout early this year, a perception that a rapid decline in U.S. oil drilling operations would affect U.S.
shale oil production exerted some impact on the market. While oil drilling operations have declined
substantially, U.S. oil output has continued moderate growth, as is well known. Oil drilling
operations have almost stopped the decline, indicating a rebound. In response to the oil price decline,
shale oil production costs have dropped substantially. A Platts report has indicated that the breakevencost for North Dakota and other major shale oil production sites has declined to a $24-41/bbl range.
While many higher-cost oil wells exist as a matter of course, shale production costs have generally
dropped to enhance shale oil production's resistance to low oil prices. We must pay attention to thefact that shale oil's resistance to low oil prices is working to cap oil prices.

A new factor behind falling oil prices is Iran's expected comeback to the international oilmarket. Although the Iran nuclear agreement has been achieved to pave the way for Iran's comeback
to the international oil market, Iranian crude oil supply in the market has not actually recovered its
past loss under Western economic sanctions. Great uncertainties exist on whether, when and to what
extent Iran would come back to the market. But the market might have begun to discountexpectations of Iran's future crude oil supply expansion into prices. These multiple supply anddemand factors have been combined to drive down oil prices.

In addition to these supply and demand factors, we see financial factors affecting oil prices.
Among financial factors are the dollar's appreciation, expected U.S. interest rate hikes and therisk-off trend accompanying the Shanghai stock market fall. Generally, supply/demand and financial
factors have been coupled to produce synergistic effects to drive down oil prices. At present, there isno sign that these factors will change greatly. Therefore, the oil market is likely to remain weak in
the immediate future. Particularly, oil prices could decline further depending on developmentsregarding the Chinese economy and the Greek debt problem.
2IEEJ：August 2015

ｃ○ IEEJ 2015

If Iran's comeback to the international oil market grows likelier with oil prices remaining
weak toward the end of this year, downward pressure on oil prices may increase further. Depending
on supply and demand conditions, possible discussions at the next OPEC meeting based on future
market developments will emerge as a focus of attention.

Contact: report@tky.ieej.or.jp
The back issues are available at the following URL
http://eneken.ieej.or.jp/en/special_bulletin.html

3