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Outlook for International Oil
Market
The Institute of Energy Economics, Japan
Tetsuo Morikawa
Senior Economist, Manager, Oil Group, Fossil Fuels & Electric Power Industry Unit
423rd Forum on Research Works on July 26, 2016
IEEJ:August 2016 © IEEJ2016
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Crude oil demand
Demand in the first quarter of 2016 grew by 1.6 mb/d or 1.7% year on year to 95.2 b/d
U.S., Chinese and Indian demand especially for transportation drove overall oil
demand growth
1
Demand Changes (year on year)
(Source) IEA
-2
-1
0
1
2
3
4
1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q
2010 2011 2012 2013 2014 2015 2016
million b/d
Others
Middle East
Other Asia
China
OECD Asia Pacific
OECD Europe
0
20
40
60
80
100
120
1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q
2010 2011 2012 2013 2014 20152016
Others
Middle East
Other Asia
China
OECD Asia Pacific
million b/d
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Crude oil supply
Supply in the first quarter of 2016 grew by 1.4 mb/d or 1.5% year on year to 96.5 mb/d
The Middle East covered a production decrease in the Americas and Africa.
2
Supply Changes (year on year)
(Source) IEA
0
20
40
60
80
100
120
1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q
2010 2011 2012 2013 2014 20152016
OPEC
Others
Africa
Latin AmericaChina
Former Soviet UnionOECD Asia PacificOECD EuropeOECD Americas
million b/d
-3
-2
-1
0
1
2
3
4
5
1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q
2010 2011 2012 2013 2014 20152016
Others
OPEC
Africa
Latin America
China
Former Soviet UnionOECD Asia PacificOECD Europe
OECD Americas
million b/d
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Slumping upstream investment under low oil prices
Upstream oil and gas investment in 2015 fell by 13% from the previous year.
Particularly, North American investment posted a remarkable decline.
When would the upstream investment decline trigger a price hike? 3
Upstream investment and oil price
(Source) IEA
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U.S. crude oil production resisting low prices
4
While production declines, shale oil productivity continues to improve
Is the rig count hitting the bottom?
Crude oil exports are increasing, while the lifting of a crude oil export ban has had
little impact so far
Production Exports
(Source) EIA
0
2
4
6
8
10
12
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4
2012 2013 2014 2015 2016
Tight oil Conventional
million b/d
0
100
200
300
400
500
600
700
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4
2012 2013 2014 2015 2016
1,000 b/d
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U.S. oil demand remains brisk
5
Demand by product Vehicle sales
(Source) EIA (Source) Motor Intelligence
Demand is brisk for gasoline as well as LPG and jet fuel
Modest gasoline demand growth in the driving season
Vehicle sales in the first half of 2016 fell year on year
0
5,000
10,000
15,000
20,000
25,000
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4
2012 2013 2014 2015 2016
Others
Fuel oil
Diesel/Gas oil
Jet
Gasoline
Petro chemical feedstockLPG
1,000 b /d
0
200
400
600
800
1000
1200
1400
1600
1800
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4
2012 2013 2014 2015 2016
SUV/Pick up truck
Passenger vehicle
1,000 vehicles
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Energy and foreign policies
of U.S. presidential candidates
6
Further policy developments within Democrat could affect shale oil and gas
development
Trump’s exclusionist remarks pose risks for financial markets
Clinton Trump
Oil/gas
・Repealing oil industry subsidies and tax
incentives ・Toughening environmental regulations
on resources development including
hydraulic fracturing
・Supporting competitive energy
development without subsidies ・Countering market manipulation by OPEC
and other state-run oil companies
Foreign
policy
・Enhancing international cooperation to
prevent terrorism ・Supporting the Iran nuclear agreement
・Blocking immigration from the Middle East
・Opposing the Iran nuclear agreement
・Supporting Middle Eastern countries and
forces fighting against ISIS and other
extremist groups
(Sources) Republican Policy Platform, media reports
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Impacts of Brexit
7
Uncertainties exist about the timing for the U.K.’s official notice to exit from the EU and the EU’s
response
The single market access is traded off with immigration restrictions
Other uncertainties include Scotland’s possible independence, French and Dutch national
referendums and German and French elections
Financial market turmoil or recession will put downward pressure on oil demand and prices
U.K.: Official notice to exit from EU
EU:Decision on response
European Parliament approves exit
agreement
European Council agrees on exit
agreement
U.K. exist from EU
Exit negotiations
Brexit schedule U.K.-EU trade agreement options
Accession
to EEA
Signing
agree-
ment
WTO
Contributions
to EU Required △
Not
required
Single market
access ○ △ ×
Immigration
restrictions × △ ○
With
in 2
ye
ars
in p
rincip
le
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China’s oil demand in recovery
8
Demand by product Vehicle sales
(Source) APEC (Source) China Association of
Automobile Manufacturers
Recovering from a slump in the second half of 2015, oil demand increased 4% year
on year in the first four months of 2016.
Vehicle sales are recovering from a plunge in February
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4
2012 2013 2014 2015 2016
LPG Gasoline
1,000b/d
0
500
1000
1500
2000
2500
3000
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 5
2012 2013 2014 2015 2016
Passenger vehicle Other passenger vehicleSUV Commercial vehicle
1,000 vehicles
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Brisk Indian demand
9
Demand growth accelerated in the second half of 2015. In the first four months of
2016, demand expanded 12% year on year.
Particularly, gasoline and diesel oil have driven oil demand growth. Vehicle sales
have been robust
Demand by product Vehicle sales
0500
100015002000250030003500400045005000
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4
2012 2013 2014 2015 2016
Oil coke Fuel oil Naphtha Gas oil Diesel
Gasoline Jet LPG Others
1,000 b/d
0
50
100
150
200
250
300
350
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4
2012 2013 2014 2015 2016
Passenger vehicle SUV Commercial vehicle
1,000 vehicles
(Source) PPAC (Source) SIAM
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OPEC production remains high
Oil producing countries failed to freeze oil production expansion in April and at the OPEC
meeting in June
Middle Eastern countries have covered production falls in Nigeria, Libya and Venezuela
Crude oil production Production changes (year on year)
10
(Source) IEA
0
5
10
15
20
25
30
35
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 5
2012 2013 2014 2015 2016
million b/d
Iraq
Venezuela
UAE
Saudi Arabia
Qatar
Nigeria
Libya
Kuwait
Iran
Indonesia
Ecuador
Angola
Algeria-3
-2
-1
0
1
2
3
4
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 5
2012 2013 2014 2015 2016
Iraq
Venezuela
UAE
Saudi Arabia
Qatar
Nigeria
Libya
Kuwait
Iran
Indonesia
Ecuador
Angola
Algeria
million b/d
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Saudi oil production under new government
Saudi Arabia will continue to give priority to its market share in 2017 as well
Under the leadership of Deputy Crown Prince Mohammed bin Salman, Saudi Arabia
announced the ambitious Vision 2030. 11
Crude oil exports and supply Energy policy targets under Vision 2030
(Source) JODI
Crude oil Maintaining production capacity
at 12.5 million b/d
Natural
gas
Increasing output to 17.8 bcf/d
by 2020
Renewable
energy
Increasing power generation to
9.5 GW by 2030
Oil refining
capacity
Increasing capacity to 3.3 million
b/d
0
2
4
6
8
10
12
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4
2012 2013 2014 2015 2016
million b/d
Export Power generation Other domestic supply
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Iran oil output restoring pre-sanction level
12
Crude oil exports and supply Oil fields planned to introduce foreign
investment
April 2016 production rose back to 3.6 mb/d
While foreign investment is required to boost oil output to a policy target of 4.7 million b/d in
2021, IPC (Iran Petroleum Contract) development is in rough waters
(Source) JOGMEC
0
1
2
3
4
5
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4
2012 2013 2014 2015 2016
Production Export Domestic supply
million b/d
(Source) JODI
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Russian crude oil output also remaining high
13
Crude oil production and supply Changes (year on year)
(Source) JODI
Russia has maintained oil output at more than 10 mb/d rivaling the Saudi level.
Russia intensively competes with the Middle East in exporting crude oil to Europe, while
exports to Asia expand via ESPO
0
1
2
3
4
5
6
7
8
9
10
11
12
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4
2012 2013 2014 2015 2016
Production Export Domestic supply
million b/d
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4
2012 2013 2014 2015 2016
Production Export Domestic supply
million b/d
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OECD inventories
14
OECD crude oil inventories remain at the highest ever level
While supply and demand go in the direction of equilibrium, massive inventories hold down
price hikes
(Source) IEA
4,000
4,200
4,400
4,600
4,800
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2011-2015 range 2015 2016 2011-2015 average
million bbl
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Financial market risks
15
Will coupling between oil and stock prices revive?
U.S. interest rate hikes will decelerate oil price hikes through the dollar’s
appreciation.
Oil prices and exchange rate Oil and stock prices
(Source) FRB
9,000
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
18,000
19,000
20
40
60
80
100
120
140
Jan 1
2
Apr 12
Jul 1
2
Oct 1
2
Jan 1
3A
pr 13
Jul 1
3
Oct 1
3
Jan 1
4A
pr 14
Jul 1
4
Oct 1
4
Jan 1
5A
pr 15
Jul 1
5
Oct 1
5
Jan 1
6
Apr 16
Jul 1
6
Brent
WTI
Dow Jones industrial average
$/bbl $
1.0
1.1
1.2
1.3
1.4
1.5
1.6
20
40
60
80
100
120
140
Jan 1
2
Apr 12
Jul 1
2
Oct 1
2
Jan 1
3
Apr 13
Jul 1
3
Oct 1
3
Jan 1
4
Apr 14
Jul 1
4
Oct 1
4
Jan 1
5
Apr 15
Jul 1
5
Oct 1
5
Jan 1
6
Apr 16
Jul 1
6
Brent WTI €/$
$/bbl €/$
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Futures market
16 The non-commercial net long position has been expanding in the first half of 2016
Brent WTI futures trading volume
(Source) CME, ICE
Non-commercial net long position on
WTI futures
0
20
40
60
80
100
120
0
50
100
150
200
250
300
350
400
450
500
Ja
n-1
2
Ap
r-1
2
Ju
l-1
2
Oct-
12
Ja
n-1
3
Ap
r-1
3
Ju
l-1
3
Oct-
13
Ja
n-1
4
Ap
r-1
4
Ju
l-1
4
Oct-
14
Ja
n-1
5
Ap
r-1
5
Ju
l-1
5
Oct-
15
Non commercial net long WTI
1,000 contracts $/bbl
0
5
10
15
20
25
30
Jan
11
Jun
11
No
v 1
1
Ap
r 1
2
Sep
12
Feb
13
Jul 1
3
Dec
13
May
14
Oct
14
Mar
15
Au
g 1
5
Jan
16
Jun
16
ICE NYMEX
million contracts
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Supply-demand balance outlook
17
Demand growth, though decelerating, will be around 1.1 mb/d in 2017.
Supply growth will fail to catch up with demand growth, leading to a supply-demand
equilibrium toward 2017
(Source) IEEJ
-1
0
1
2
3
88
89
90
91
92
93
94
95
96
97
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2014 2015 2016 2017
million b/d
Demand Supply Gap
IEEJ:August 2016 © IEEJ2016
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Major factors to fluctuate oil prices toward 2017
18
Supply and demand fundamentals should boost prices
But considerable uncertainties about GDP growth, U.S. interest rate hikes and
Brexit will slow down prices surge
Yet large-scale supply disruptions could trigger price hike at least for the short-
term
- U.S. interest rate hikes
- Brexit spillover
- Financial market turmoil
- U.S. production hitting bottom?
- Continuous demand growth
- Delay in U.S. interest rate hikes
- Supply disruptions
IEEJ:August 2016 © IEEJ2016
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Price increases since early this year to decelerate
19
(Source) IEA, The Institute of Energy Economics Japan
Prices will average $50/bbl for Brent, $49/bbl for WTI and $47/bbl for Dubai in
the second half of 2016, and $55/bbl for Brent, $54/bbl for WTI and $52/bbl for
Dubai in 2017.
0
20
40
60
80
100
120
140
Jan
12
Mar
12
May
12
Jul 1
2
Sep
12
No
v 12
Jan
13
Mar
13
May
13
Jul 1
3
Sep
13
No
v 13
Jan
14
Mar
14
May
14
Jul 1
4
Sep
14
No
v 14
Jan
15
Mar
15
May
15
Jul 1
5
Sep
15
No
v 15
Jan
16
Mar
16
May
16
Jul 1
6
Sep
16
No
v 16
Jan
17
Mar
17
May
17
Jul 1
7
Sep
17
No
v 17
$/bbl
WTI
Brent
Dubai
Iran sanction
lifted
China stock market crush
EUSanctionon Iran
Shale oil production
peaked in US
QE ended in US
Strike in KuwaitFire in Alberta
Force Majeure in
Nigeria
Brexit negotiation
US production
bottom out?
Economicslowdown?
OPEC meeting
Shale oil production growth in US
US interest rate rise?
US Presidential
election
OPEC meeting
Oil producing countries/OPEC
meetings
IEEJ:August 2016 © IEEJ2016
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