IEEJ：October 2018○ｃIEEJ 2018
Special Bulletin
A Japanese Perspective on the International Energy Landscape (400)

October 29, 2018

A Personal view on the World Oil Market Based on Dialogue with OPEC
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn October 24, I visited the Secretariat of the Organization of the Petroleum ExportingCountries (OPEC) in Vienna for a dialogue on prospects for the international energy and oil market.
The annual dialogue took place between numerous OPEC Secretariat executives, and I and otherexperts from major Asian research institutes, and energy industry officials. These participants hadvigorous discussions under the Chatham House rule. Based on the dialogue, I here would like toshare my personal view on the present situation and prospects for the international oil market.
First, the dialogue led me to feel anew that great uncertainties exist concerning theshort-term outlook for the international oil market and crude oil prices. Attracting attention at thedialogue were signs of changes in oil supply and demand fundamentals supporting crude oil pricehikes from the beginning of 2018. A joint oil production cut by OPEC and some non-OPEC oil
producing countries including Russia started in 2017 and successfully worked to eliminate
oversupply and reduce oil inventories. This is a fundamental factor supporting the crude oil pricerebound and hike. In the current international market, however, supply is expanding globally while
downside risks for demand are feared. As a result, data at the International Energy Agency indicatethat commercial oil inventories in the Organization for Economic Cooperation and Development
turned up in June and continued increasing in July and August.
While oil demand in 2019 is expected to increase by 1.3 million barrels per day with
global economic growth at 3.6-3.7%, supply growth is predicted by some analysts to exceed thedemand increase to push up inventories from the beginning of the year. In the United States that isleading the supply expansion, production is predicted by many analysts to increase by 1.2 million
bpd in 2019 from 2018 after posting a record rise of 1.8 million bpd in the previous year. Canada andBrazil are also expected to expand production. Russia, which has participated in OPEC andnon-OPEC oil producing countries’ joint oil production cut, is also expected to raise production bymore than 200,000 bpd in 2019.
OPEC production is also increasing. Total OPEC production, excluding output by
Equatorial Guinea and Congo that joined OPEC in and after 2017, continued to decrease until hitting
a low of 31.56 million bpd in May 2018, according to the International Energy Agency. After OPEC
decided on its effective production expansion at its meeting in June, however, OPEC production rose
gradually, reaching 32.34 million bpd in September, up about 800,000 bpd from May. As a result,
OPEC production clearly surpassed call on OPEC, or OPEC production required to achieve asupply-demand equilibrium, in the second and third quarters of this year, leading to an increase ininventories.
In such situation, global economic risks have shaken markets. A global stock market crash
1

IEEJ：October 2018○ｃIEEJ 2018
triggered by a New York market plunge on October 10 seemingly came to a pause. On October 24
when we were meeting with OPEC Secretariat officials, however, the Dow Jones industrial averageon the New York Stock Exchange suffered a heavy fall of more than 600 points, triggering a global
stock market crash again. Financial market participants now have no choice but to remain sensitive
to signs of the future course of the global economy. In the dialogue with OPEC, participants hadinteresting discussions on the impact of the escalating trade war on the global economy and oil
demand, leading me to feel that the meeting was highly interested in the matter.
As for oil oversupply that could be caused by the deceleration of oil demand growth on therealization of global economic risks amid general production expansion, oil market analysts still
remember the “Ghost of Jakarta” as noted in “A Japanese Perspective on the International Energy
Landscape (390).” In the future, OPEC will be required to do a very difficult job of steering oil
production policy.
Meanwhile, Iran’s oil exports and production have been decreasing due to U.S. economicsanctions. Middle Eastern tensions regarding Iran are steadily growing. As hopes are growing on
Saudi Arabia’s surplus production capacity to cover a decline in Iranian oil exports, global attention
is focusing on the oil kingdom’s importance for oil market stability. At such time, the so-called
Khashoggi scandal is shaking Saudi Arabia, leading developments in the kingdom to attract global
attention. As mainly Western countries grow critical of Saudi Arabia, the kingdom’s politics,
economy and policies are becoming a great matter of concern to the world. Various uncertainties
about the future course of the Middle Eastern situation and the difficulties in predicting future
developments have played a role in increasing oil market uncertainties. The oil market is likely toremain unstable and nervous in the immediate future, sandwiched between the “Ghost of Jakarta”
and growing geopolitical risks in the Middle East.
The dialogue at the OPEC Secretariat led me to feel anew that there are various
uncertainties about the long-term oil market outlook. On the demand side, the issue of peak oil
demand cannot be ignored. As noted by the World Oil Outlook 2018, a long-term outlook releasedby OPEC in September, a main scenario for most long-term outlooks in the world indicates thatglobal oil demand will continue increasing until 2040 to 2050, supported by growth in demand foroil for petrochemical production and transportation (covering automobiles, ships and aircraft).
However, future energy transitions may include not only continuous, sustainable and evolutionary
ones but also revolutionary ones that would bring about disruptive or dramatic changes. Particularly,
it may be difficult for anyone to project the impact of any revolutionary transition. OECD countries’
strong oil phase-out policy countering the 1970s oil crises was coupled with a recession to reduce
global oil demand in the first half of the 1980s. Whether or not anything would happen todramatically change growing non-OECD oil demand will be very important for the future.
Numerous important uncertainties also exist about oil supply. One of them is about future
U.S. shale oil production. Given that U.S. shale oil production has been a central factor behind theinternational oil market’s dramatic changes over the past five years, it is natural for the future courseof U.S. shale oil to be important. While the WOO 2018 projects U.S. oil production to turndownward in 2027 with shale oil output peaking out, the U.S. Energy Information Administration
predicts U.S. oil production to continue moderate growth through 2050. Whether or not U.S. oilproduction would peak would have great influence on the global oil supply-demand balance. Various
long-term outlooks are divided over future Russian oil production as well. Various uncertainties
2

IEEJ：October 2018○ｃIEEJ 2018about future oil production in the United States and Russia competing for the position of the world’s
largest oil producer indicates that the significance of supply and demand adjustments by the othermost important oil producing country of Saudi Arabia would increase further.
The world is full of uncertainties. Those responsible for energy policy and businessdecisions are always required to consider how to address uncertainties.

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