IEEJ: February 2006

Summary of the 393rd Forum on Research Works
December 16, 2005

Prospects for the International Oil Market and Crude Oil Prices in 2006
KOYAMA, Ken, PhD, Senior Research Fellow,General Manager, Energy Strategy Unit,
Institute of Energy Economics, Japan<Research Objectives>
On August 30, 2005, the near-month West Texas Intermediate (WTI) futures
price – which serves as a benchmark for crude oil prices in the world oil market – hit arecord high, temporarily rising above $70/barrel (closing price: $69.81). In addition, theaverage WTI futures price from January to November of 2005 marked $56.5/barrel,
remarkably higher than the 2004 average ($41.5/barrel).
One of the factors behind this price hike was that the supply/demand balance inthe overall world oil market remained tight, because while the world’s oil demand
continued to grow, though slower than in the previous year (2004), non-OPEC crude oil
production remained at the previous year’s level due to a slowdown in Russia’s
production increase and the United States’ declined production caused by hurricane
damages. In such a situation, the great hurricanes that hit the U.S. coast of the Gulf of
Mexico from the end of August to September caused enormous damage to the region’s
refining capacity. As a result, the oil product supply/demand balance became stringentand prices soared in the U.S. oil market, which plays the central role in the priceformation in the world oil market. This had an extremely significant impact on thisyear’s price hike, including the above-mentioned rise to the new record high.
Since the trends in the international oil market and crude oil prices have aconsiderable impact on the future developments of the Japanese and global economies
and of the world energy market, it is extremely important to gain an understanding ofthese trends and analyze their future outlook. This report prospects the international oilmarket and crude oil prices in 2006 by examining the supply/demand fundamentals andvarious risk factors based on the above recognition.
<Key Conclusions>
1. The important factors that will affect the trends in the international oil market andcrude oil prices in 2006 include: (1) the global trend in oil demand growth; (2) the1IEEJ: February 2006

non-OPEC production trend; (3) the trend in OPEC’s policy and production capacityexpansion; (4) the situation of surplus supply capacity in the global oil market,including OPEC’s excess crude oil production; and (5) the possibilities for supply
disruptions and market destabilizations. As future developments of these factors involve
considerable uncertainties, it is significant to prospect the international oil market byassuming the most probable Reference Case as well as other cases (High-price Case andLow-price Case).
2. The Reference Case for prospecting the 2006 world oil market premises that: (1) theworld’s oil demand will increase by about 1.7 million b/d over the previous year in2006, supported by the robust world economy; (2) non-OPEC crude oil production will
increase by about 1.4 million b/d over the previous year, backed by the United States’
recovery from hurricane damages and Russia’s moderate production increase; (3)OPEC’s crude oil production capacity will gradually expand, mainly in Nigeria andSaudi Arabia, and will increase to about 33 million b/d by the end of 2006; and (4)supply disruptions may occur sporadically in major oil-producing countries, but will not
become serious. In this case, the annual “call on OPEC crude oil” stays almost the sameas in 2005 at slightly less than 29 million b/d, which is lower than the current highproduction level (November 2005: slightly less than 30 million b/d). Since OPEC’s
crude oil production capacity will also increase, its surplus production capacity will
gradually expand. As a result, the supply/demand balance in the world oil market willslowly improve in principle.
3. However, the shortage of refining capacity and the lack of supply flexibility in theU.S. oil market, which were among the causes of the price hike in 2005, will remainpresent without being resolved in the short term. In addition, the impact of sporadic
supply disruptions and OPEC’s policy to prevent a drastic price drop will support thecrude oil prices and may cause a price hike, depending on how these factors develop.
4. Under these circumstances, the world oil market in 2006 will basically see
improvement in the supply/demand balance. However, due to the above factors
supporting the prices, crude oil prices will remain high at the present level, and theannual average WTI price will be around $55 to $60 per barrel.
5. The High-price Case mainly premises that: (1) the world’s oil demand will steadily
increase, posting a demand increase of about 2 million b/d over the previous year; (2)2

IEEJ: February 2006

non-OPEC production will increase over the previous year, but the production increase
will only be 1 million b/d or less; (3) as a result, the call on OPEC crude oil will steadily
increase; and (4) supply disruptions and risks occur in major oil-producing countries,
and will have an impact on the market. In this case, the world oil market will continue
to be vulnerable to supply/demand fluctuations and external shocks, because thesupply/demand balance will become tighter and OPEC’s surplus production capacity
will remain at the present low level. Therefore, the crude oil prices will further surge
from the present level and continue to hit new highs depending on the occurrence ofsupply disruptions in major oil-producing countries. As a result, the crude oil price willreach an even higher level while fluctuating wildly, and the average WTI price for 2006
will be around $65 to $70 per barrel.
6. In contrast to the above case, the Low-price Case premises that: (1) the world’s oil
demand growth will quickly slow down due to factors including the stagnant world
economy (an increase of about 1.2 million b/d over the previous year); (2) in non-OPEC
countries, production will recover in the United States, and production will growbeyond expectation mainly in former Soviet Union and in West Africa; (3) the call on
OPEC crude oil will dramatically decline, and OPEC’s surplus production capacity willconsiderably expand; and (4) occurrence of supply disruptions in major oil-producing
countries will be limited. As a result, the supply/demand balance will improve andOPEC will be pressed to cut its production dramatically, particularly from the second
quarter onward. Under this situation, the crude oil prices will come under downward
pressure in the low-price case, and the average WTI price for 2006 will be around $45
to $50 per barrel.
Contact: report@tky.ieej.or.jp

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