IEEJ：May 2019○ｃIEEJ 2019
Special Bulletin
A Japanese Perspective on the International Energy Landscape (428)

May 15, 2019

Discussions in Europe on International Oil/Gas Situation Growing Uncertain
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
From May 9 through 15, I visited the United Kingdom and the Netherlands where I had
opportunities to discuss European political and economic conditions and the international energy
situation including oil and gas conditions. On May 13, I attended the FLAME 2019 international
conference on gas in Amsterdam, giving presentations at two sessions. In the following, I would liketo introduce particularly impressive arguments on the oil and gas situation in those discussions.
First, I would like to note that the discussions came as the overall international energy
situation grew uncertain on turbulent developments in the world from late April to May. Regarding
the international oil situation, the United States announced the termination of waivers on its Iran oil
embargo for eight economies in late April and launched the full Iran oil embargo on May 2, leading
geopolitical risks to rapidly grow. While Saudi Arabia and some other oil producing countries areexpected to increase oil production to cover a decline in Iranian oil exports and maintain an adequate
supply-demand balance, tensions regarding Iran are growing to push up crude oil prices. Meanwhile,
the U.S.-China trade war resurged suddenly, leading market players to grow concerned that the twocountries’ race to raise tariffs would seriously affect their economies and bring about global
economic deceleration. As a matter of course, this development exerts downward pressure on crude
oil prices.
An interesting view given in the discussions was that the present international oil market
represents an equilibrium or a tug of war between upward and downward pressure factors. Upwardand downward pressure factors for crude oil prices coexist now, with their future developments oreffects remaining uncertain. As a result of their equilibrium, crude oil prices have remained in anarrow range. The benchmark Brent futures price has stayed in a $70-72 per barrel range since late
April. Despite the emergence of factors that can push the market upward or downward, the price has
strangely been stable. This is seen as a result of the tug of war equilibrium.
However, there is no guarantee that the equilibrium will continue. If an upward or
downward pressure factor grows or is expected to grow dominant for some reason, the equilibrium
may rapidly collapse to trigger a steep rise or fall. In this sense, market players will closely watch
how the abovementioned two factors will change. In the face of uncertain and widely different futurescenarios, the Organization of the Petroleum Exporting Countries and some non-OPEC
oil-producing countries, in particular Saudi Arabia, will be required to take a careful approach as asupply/demand coordinator in the international oil market. Topics and decisions at the next OPEC
meeting on June 25 and the OPEC-Plus ministerial meeting on June 26 will depend on how crude oil
prices and market conditions will change towards the meetings.
There were interesting arguments about gas as well in the discussions. First, great interest
was indicated in the future course of China’s gas demand that has attracted attention from gas market
stakeholders in the world with its rapid increase after 2017. In discussions on Asia’s liquefied natural
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IEEJ：May 2019○ｃIEEJ 2019gas market, high interest was also indicated in China’s future gas/LNG demand. Gas market
stakeholders agree that China’s demand for gas/LNG as a clean energy source will expand. However,there are various views about the speed and extent of the expansion.
Factors influencing the speed of the expansion include economic growth as a fundamental
one. The deterioration of the U.S.-China trade war will affect not only the oil market and oil prices.
If China’s economic growth remarkably decelerates on the deterioration, China’s overall energy
demand will be greatly affected. If China’s energy imports including oil, gas/LNG and coal slow
down, the supply-demand balance and market sentiment regarding each energy source will begreatly affected. Given that China’s LNG import expansion has remained the largest LNG market
driver in the past few years, any sharp fall in China’s LNG import growth may exert great influenceon the LNG market. Last summer, the Institute of Energy Economics, Japan, released an analysis
indicating that China’s economic growth could fall by 2.9 percentage points from a reference level inthe worst case for the escalation of the U.S.-China trade war. In such case, LNG and oil markets may
be seriously affected.
U.S. goods subject to China’s tariff hikes include LNG. U.S. LNG developers might haveexpected to export LNG to the expanding Chinese market. However, the tariff hikes may change thesituation, affecting LNG flows. In such event, procurement and supply in the world’s LNG market
may be required to become even more flexible.
The uncertainties about China’s gas/LNG market include not only the influence of thetrade war but also how fast and much China would switch from coal to gas. Behind the rapid
expansion in gas/LNG demand since winter 2017 has been the switching from coal to gas mainly inindustry and household sectors. In this respect, some analysts view the switching as having a great
enough potential to support rapid gas demand expansion. However, others say that it may be difficult
to expect demand for such switching as much as seen in the past two years, as the switching has
already ended in major consumption regions or regions where such switching is easy.
In regions where the switching is difficult, a problem is whether gas/LNG can beintroduced into the market competitively. Regulations as well can influence the switching from coal
to gas/LNG that is required in response to serious air pollution. However, the problem ofaffordability or whether consumers can pay for gas/LNG instead of coal must also be taken intoaccount. The problem is not limited to China but is more important in lower-income emerging
countries in Asia including India, other South Asian countries and Southeast Asian nations. Thecurrent Asian spot LNG price level (around $6 per million British thermal units) may be acceptable
for these emerging countries. Prices close to $10/MMBtu are seen by many analysts as difficult toaccept. Asian gas/LNG demand will depend on economic growth, environmental regulations,competition among fuels and affordability in China and the whole of Asia.
There were also interesting arguments about a gap emerging between spot LNG prices andlong-term contract LNG prices indexed to crude oil prices. As crude oil prices move around $70 perbarrel, long-term contract LNG prices indexed to crude oil prices are $10-11/MMBtu. Their gap withspot LNG prices reflecting supply and demand has widened to $4-5/MMBtu. If the gap remains at
the current levels or expands further, it may affect opinions and negotiations on LNG pricing,according to an argument raised in the discussions in Europe. This argument is an interesting one
based on similar experiences or events in Europe. We will have to pay attention to future
developments regarding the gap.
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IEEJ：May 2019○ｃIEEJ 2019
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