IEEJ：March 2017ｃ IEEJ 2017
○Special Bulletin
A Japanese Perspective on the International Energy Landscape (316)March 24, 2017

Oil Producing Countries’ Coordinated Production Cut Exposed to MarketPressureKen Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Crude oil prices have been gradually falling. On March 23, the front-month futures contract on
the West Texas Intermediate crude closed at $47.70 per barrel, down $0.34/bbl from the previous day.
The key Brent crude futures contract also lost $0.08/bbl to $50.56/bbl, the lowest since lastNovember 30.
After the Organization of the Petroleum Exporting Countries announced an agreement to cut
production in a coordinated manner at its conference late last November, crude oil prices rose fromless than $50 to a $50-55/bbl range. The key WTI futures price remained in the boxed range fromearly December to early March on a daily closing basis. Hopes on OPEC and non-OPEC oil
producing countries’ coordinated production cut supported the bottom of the range while concerns
about high oil inventory levels and growing U.S. shale oil production kept downward pressure on theprice at the ceiling. The price was stable within the narrow range.
In fact, however, a sign of a change in the trend emerged around late February. The WTI pricestarted a downward trend after peaking at $54.45/bbl on February 23. The downward trend grew
clearer since early March. From March 3, the WTI price continued falling for seven market days. OnMarch 9, it fell to $49.28/bbl, slipping below $50/bbl for the first time in some three months. It
slightly rebounded later but basically remained weak. From March 17, the key WTI futures pricecontinued falling for three market days, slipping below $48/bbl. The key Brent futures price also
declined to the level where possibility of below $50/bbl oil prices emerged.
What factors are behind the oil price decline? Usually, various factors compositely influence
crude oil prices. For example, stock prices ended their upward trend since the Trump Rally in early
March and weakened gradually, exerting some impact on crude oil prices. Market players havebecome skeptical of any steady upward trend for the U.S. economy and the world economy andbegun to find factors of their concerns, leading to some impact on crude oil prices.
However, more direct influences on crude oil prices have come from oil supply and demand
fundamentals. While OPEC and non-OPEC oil producing countries have implemented theircoordinated production cut, global oil inventories have remained high. Particularly, U.S. crude oilinventories have basically continued increasing since early this year. Latest data indicate that private
sector crude oil inventories reached a significantly high level. The inventory expansion runs counterto the needed correction of the inventory level cited by OPEC and non-OPEC oil producing
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IEEJ：March 2017ｃ IEEJ 2017
○countries as the goal for their coordinated production cut, working to exert downward pressure on
crude oil prices. A more important factor behind the high inventory level is a greater-than-expected
recovery in U.S. shale oil production.
We may have to take into account the Trump administration’s policy support for U.S. shale oilproduction. At present, however, the support, though making some contribution to shale oilproduction, might have failed to exert any real impact on shale oil production. Rather, crude oil
prices’ recovery beyond $50/bbl on the coordinated production cut might have encouraged shale oil
producers to expand output. A growing view is that U.S. shale oil producers might have successfullyincreased their business efficiency and cut costs for their survival during the weak oil price periodthat lasted for more than one and half years from the second half of 2014, becoming able to maintainand expand production more easily than earlier conceived at the present price levels. When I
discussed crude oil and other energy problems with various experts in Europe two weeks ago and in
Houston last week, I felt that they were growing more bullish and optimistic about U.S. shale oil
production. In fact, U.S. crude oil production returned to a growth path in the fourth quarter of 2016
and increased by about 700,000 barrels per day in six months from the first week of last October.
What are the implications of the crude oil price trend and background factors for the trend? Ifeel that the market is prompting oil producing countries to take the next action by shaking themamid their coordinated production cut. The market is apparently questioning whether oil producing
countries view their coordinated production cut since early this year as sufficient and how they willdeal with the coordinated action in the future.
As indicated by various data sources, OPEC has complied with the production reduction target
more than expected. According to the International Energy Agency, the rate of compliance with thetarget for OPEC came to 105% in January, meaning that the OPEC production cut in the month was
5% larger than the target. The rate, though falling slightly, was still as high as 91% in February.
Nevertheless, crude oil prices indicated their downward trend. The market might have demonstrated
to oil producing countries that the present production cut is not enough to produce effects including
an oil inventory decline. Complicating the problem is the fact that OPEC’s high rate of compliancewith the production reduction target is attributable to Saudi Arabia’s substantial production reduction.
The average rate of compliance with the target for Saudi Arabia in January and February stood at138%, the highest among OPEC members. Such rates for other OPEC members ranged wide,
indicating that the OPEC members are not necessarily united to comply with the coordinatedproduction cut.
This point is clear when we turn our eyes to non-OPEC oil producing countries. Russia’s crude
oil production, though falling by 100,000 bpd from December, is as high as 11.48 million bpd,
according to the IEA. Under such situation, the market has generated downward pressure on crude
oil prices. The coordinated production cut is planned to end in six months from the beginning of thisyear. Oil producing countries indicated that the six-month coordinated production cut would besufficient. Apparently, they had a strategy of promoting oil inventory reduction with the six-monthproduction cut to buy time until the market goes in the direction of full rebalancing. However, thepresent market environment is greatly shaking the strategy.
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The market may be asking oil producing countries if they plan to continue the coordinatedproduction cut until the end of this year instead of ending it in six months, how they would improvetheir wide-ranging rates of compliance with the production cut target, and what may be a specificproduction cut target if the coordinated cut is continued into the second half of this year. Dependingon answers or responses to these questions from oil producing countries, particularly Saudi Arabia,
crude oil prices may fluctuate greatly. In a run-up to the next OPEC conference in late May, thetrends of the market and oil producing countries will attract attention.

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