IEEJ：August 2015

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Special Bulletin
A Japanese Perspective on the International Energy Landscape (234)August 28, 2015

Behind the recent Double-Dip Decline in Crude Oil Pricesand International Oil Market
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
I visited Washington DC and New York from August 24 through 27, to have discussion on theissues related to crude oil prices and international oil market with U.S. government officials, oilindustry people and think tank researchers at various meetings.
Just amid these meetings, crude oil prices declined rapidly. As fears about the future Chinese
economy shook the world in response to a new plunge on the Shanghai stock market, a global stock
market fall emerged. Under such situation, crude oil prices nose-dived. The benchmark West Texas
Intermediate crude oil futures price sank to this year's new low of $38.24 per barrel on August 24,
slipping below the psychologically important barrier of $40/bbl. It thus experienced a double-dip
decline after rallying from the low seen early this year.
As a matter of course, the discussions focused on how to analyze the double-dip decline andwhat crude oil prices would be like in the future. My discussions with many American experts
indicated many issues. In the following, I would like to sum up issues I view as essential andimportant.
First, the experts agreed that while serious fears about the Chinese economy have shaken thepsychology of market players and led to the double-dip decline by prompting selling to feed on itself,
substantial oil oversupply has been behind the weak oil prices. They also shared the view that it
would be difficult to resolve the oversupply in the short term for the reasons explained below.
Interesting arguments were seen on global oil demand among multiple factors behind theoversupply. The International Energy Agency and other analyses forecast that global oil demand will
increase by 1.6 million barrels per day from the previous year in 2015 and by 1.4 million bpd in2016 partly thanks to low crude oil prices. But a dominant view seen at my discussions with theAmerican experts was that real global oil demand or actual consumption would not be as strong as
indicated by the forecast. They pointed out that a substantial oil inventory increase symbolizing theloosening supply-demand balance indicates the present demand as including oil for expanding
inventories and reserves. They also interpreted economic realities as indicating that oil consumption
in major countries other than the United States might not have grown so much. Therefore, any greatfears about the future Chinese economy lead to speculation that consumption would decline further,accelerating the loosening of the supply-demand balance.
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As for oil supply, many of the experts agreed that oil output in non-OPEC oil producing
countries has decelerated steady growth that had continued until 2014 and would make thedeceleration clearer due to the latest dip. An interesting view given in the discussions was that if
crude oil prices slip below $40/bbl and fall further, high-cost oil production may have a greater
chance to be lost. Those that would be the most vulnerable to the dip are a large number of stripper
wells producing only 10 barrels per day each in the United States, some of the experts noted. Given
their very small sizes, low efficiency and production characteristics, these wells, if once shut down
due to low prices, would be difficult to restart production, they pointed out, calling attention to their
possible loss. These small wells' total output is estimated at several hundreds of thousands of barrels
per day. The estimate is not necessarily small. Interestingly, some of the American experts called forpaying attention to this point in analyzing non-OPEC production depending on future price changes.
Meanwhile, an impressive argument heard frequently at the discussions was that shale oil
production has enhanced its resilience to low oil prices. Some of the American experts noted that theU.S. oil industry, including many oil and gas companies undertaking shale oil and gas production,
has been striving to cut costs in response to low prices. They pointed out that industry-wide
efficiency improvement efforts and actual falls in overall resources and raw materials prices as wellas the oil price plunge have led costs to be cut more than expected. As a matter of course, shale oil
production has resisted low oil prices since early this year far more than expected as finance hascontinued for shale oil producing companies. Whether such finance would continue in the future isuncertain. Given this and other problems, U.S. oil production growth may inevitably slow down if
oil prices remain low. Nevertheless, many of the American experts in discussions with me noted that
overall U.S. oil production, including shale oil output, has generally enhanced its resilience andflexibility to low oil prices as the oil price plunge has led to production cost cuts and improvedresponses of individual firms and the entire industry. Some pointed out that U.S. oil production may
continue expanding over a long time although growth may decelerate in the immediate future.
I heard various views about how the Organization of the Petroleum Exporting Countries would
respond to the oil supply and demand environment. A common view was that OPEC including Saudi
Arabia has indicated no sign of any revision to its oil production policy even in the face of thedouble-dip decline in oil prices. As for Iranian crude oil's comeback to the international oil market,
which could come upon Western countries' possible termination of Iran sanctions and make the oiloversupply even greater, many of the American experts forecast that Saudi Arabia and other OPEC
countries may still try to maintain their market shares, triggering another price-cutting race. In thisrespect, what could bring about Saudi Arabian or OPEC policy changes has emerged as a matter ofconcern to many oil market players. Given that some development regarding the Iran sanctions is
expected to come late this year, some of the American experts noted that what OPEC would discussand decide at its next general meeting would be important and worthy of close attention. This notion
was interesting.
The global stock market fall came to a pause as the Shanghai market decline ran its course, withU.S. gross domestic product data indicating the firmness of the U.S. economy. In response, crude oil2

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prices rose back above $40/bbl on the 27th. As far as the great oversupply remains unchanged,
however, no optimism can be warranted for the future. Many of the American experts in thediscussions noted that crude oil prices could come under downward pressure again depending on
future developments and that how far oil prices could decline in such case would be uncertain. We
may have to closely watch the fast-changing international oil market and crude oil prices.

Contact: report@tky.ieej.or.jp
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