IEEJ：November 2017○ｃIEEJ 2017
Special Bulletin
A Japanese Perspective on the International Energy Landscape (351)

November 21, 2017

Short to Medium-term Oil Supply Perspective
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
From November 16 through 20, I visited the United Kingdom to have opportunities fordiscussions with energy experts and industry people, including a workshop sponsored by the Oxford
Institute for Energy Studies. Among the various topics in the discussions was a short tomedium-term international oil market prospect seen particularly from the supply side. Here, I would
like to summarize impressive points of the discussions.
The grand assumption for the discussions was that the present international oil market is
gradually going in the direction of rebalancing, with inventories being reduced gradually. As a matterof course, most experts and oil market participants think that the inventory reduction toward a
supply-demand equilibrium has taken far more time than expected and has remained very slow. The
largest factor behind such situation is that U.S. shale oil production has increased its resistance tolower oil prices and can increase even at present price levels.
Therefore, the discussions naturally focused on a U.S. shale oil production prospects fornext year and beyond. The discussions covered various angles including present and projected
productivity improvement at various shale oil production regions and challenges involving shale oil
producers’ investment, production behaviors and fundraising operations. However, a dominant view
was that shale oil production would increase at an annual rate of around one million barrels per dayin 2018 and 2019 as the breakeven cost declines amid ongoing progress in productivity improvement.
Later, shale oil production is expected to increase further, though more slowly, through the early2020s. Particularly, shale oil production growth will work to restrict crude oil price hikes in 2018and 2019.
In the discussions, however, a participant presented a view that as global oil demand
continues steady growth over a medium term, oil supply from projects subject to past final
investment decisions, even including growing shale oil supply, may fail to meet demand in aggregate
term, causing a possible large supply-demand gap or supply shortages in the future. If many market
participants share the prospect of a supply-demand gap emerging over a medium term, oil companies
may change their decisions and investment behaviors and implement investment required to preventthe supply-demand gap, according to another view presented in the discussions. However, anotherschool of thoughts was that oil companies have maintained their cautious attitude on investment andare unlikely to expand capital spending at least at the present oil price levels, even if a
supply-demand gap is expected to come over a medium term.

1

IEEJ：November 2017○ｃIEEJ 2017
If a supply-demand gap emerges over a medium term, possible future scenarios are that oil
prices may post a transition in the form of a moderate, smooth increase or a rapid spike, dependingon oil companies’ investment decisions and supply expansion to fill the gap. We must take note of
the fact that such price change originates from a supply-demand balance change and differs from aspike caused by geopolitical risks or supply disruptions.
Arguments about oil policy options for the Organization of the Petroleum ExportingCountries, particularly its leader Saudi Arabia, were interesting as well. As for an OPEC meeting
planned for late November, discussion participants roughly shared a view that OPEC and non-OPEC
oil producing countries including Russia would agree to extend their coordinated production cut. Asfor policy options for Saudi Arabia, a discussion participant argued that the kingdom might (1)extend the coordinated production cut while seeking participating countries’ better compliance withproduction quotas, (2) return to the market share strategy with the compliance lost, or (3) serve as aswing producer to adjust supply and demand. But each option would not be easy for Saudi Arabia toadopt.
As oil inventories have decreased gradually since late October, the key Brent crude oil
futures price has risen back above $60 per barrel with market players being conscious of geopoliticalrisks, allowing OPEC to take a breath. However, no optimism can be warranted for OPEC. Crude oil
price hikes could encourage U.S. shale oil production to increase and could weaken coordinatedproduction cut participants’ compliance with production quotas. OPEC could thus be plagued withdifficult problems. If current price levels cannot encourage oil companies to substantially expand
investment as noted above, the situation may remain unchanged, leading to a widening
supply-demand gap in the future. Then, the oil market could grow more volatile instead of posting
any smooth transition.
Too low crude oil prices are a big problem for most oil producing countries including
Saudi Arabia from various viewpoints including balanced budgets. However, too high crude oil
prices could affect future oil demand growth, becoming a significant problem particularly for Saudi
Arabia. At a time when the potential rapid spread of electric and other advanced vehicles attracts
attention, too high crude oil prices cannot be expected to bring about favorable results for Saudi
Arabia. In a bid to maintain its market stabilization power, Saudi Arabia could implement investment
to expand oil production capacity to keep or secure surplus capacity, according to some discussion
participants.
Apart from oil market supply and demand analyses, interesting arguments about growingMiddle Eastern geopolitical risks were made in the discussions. So far, high geopolitical risks in theMiddle East have basically coexisted with lower crude oil prices. Over the past several weeks,however, crude oil prices have reacted to the Kurdish problem in Iraq and the reported arrest anddetention of numerous royal family and cabinet members in Saudi Arabia. While how thesegeopolitical risks would develop in the future remained uncertain, discussion participants madearguments about the possibility of these risks deteriorating to directly affect oil supply. In such event,geopolitical risks could lead to a crude oil price spike. Then, efforts to shift away from oil could
globally expand and accelerate, leading oil demand to peak.
2IEEJ：November 2017○ｃIEEJ 2017

Oil crises in the 1970s drove strong oil substitution policies in member countries of theOrganization for Economic Cooperation and Development, while decelerating the world economy.
As a result, global oil demand decreased in the early 1980s. If a significant event emerges on thesupply side from now on, a similar policy drive may come in the entire world including non-OECD
countries that have been expected to lead global oil demand growth in the future. Oil supply stability
and the future course of oil supply are key factors that could move the world.

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