Takayuki Nogami, a chief economist of the Japan Oil, Gas and Metals National Corporation, spoke about the current crude oil market with The Yomiuri Shimbun. The following are excerpts from the interview.
The Yomiuri Shimbun: How is the November agreement between OPEC and non-OPEC countries including Russia to be interpreted?
Nogami: OPEC, led by Saudi Arabia, and non-OPEC oil-producers such as Russia have agreed to extend the current cut in oil output for nine months. I believe that OPEC has successfully projected the image of itself in the market as an actor that can effectively play a role in pursuing the rebalance between supply and demand.
A: Some forecasters predicted that the oil output cut would not be extended for more than six months because countries such as Russia are against extending it too much. However, there were fears that investors would lose confidence in OPEC and prices would plummet if the extension was limited to six months.
The output cut is set to continue until the end of 2018, and global supply and demand are expected to reach an approximate equilibrium with an annual supply of around 30 billion barrels.
Inflows of funds into the market
Q: How are we to understand the effects this will have on the crude oil market?
A: Although the latest extension did not come as a surprise, crude oil prices have become increasingly buoyant.
High global stock prices are believed to have boosted asset values for investors such as hedge funds, making it easier for them to take risks and leading to inflows of funds into the crude oil market. This year’s crude oil prices may rise to around $60-$70 per barrel.
One of the factors behind this upward trend is heightened geopolitical risk. There are concerns that the administration of U.S. President Donald Trump will escalate tensions with Iran and reimpose sanctions that could cut off crude oil flows. Likewise, if tensions between Saudi Arabia and Iran escalate, that may also affect the supply of crude oil.
Another factor behind the rise in prices is the devastating hurricanes along the U.S. Gulf Coast that shut down refineries and reduced stockpiles of fuels such as gasoline and diesel.
Competition with shale oil
Q: How are OPEC’s presence in the crude oil market and the recent trends in shale oil being interpreted?
A: It can’t be said that OPEC has strengthened its position in the market, as it is competing with U.S. shale oil.
In the 2010s, shale oil production went into full swing, limiting OPEC’s pricing power. Although the United States is one of the world’s leading crude oil producers, it is not a member of OPEC.
If prices rise to the lower $50 a barrel range, the number of profitable well sites will grow, causing shale oil production to accelerate. A forecast made in 2011 by the International Energy Agency suggested that U.S. shale oil production will peak around 2020 at around 1.4 million barrels a day and then gradually decline. However, current output is at nearly 5 million barrels a day. It is even possible that continued growth in output will lead to OPEC’s controls becoming ineffective and result in prices falling to the $40 level a barrel.
Nevertheless, it has only been about five years since shale oil production went into full swing, and the extent of reserves, how far production costs can be lowered, and when it will peak are still unknown.
Although output has grown considerably faster than forecasts, there is also the possibility that the oil will be more and more difficult to extract in the future. In the 1980s, crude oil production in areas such as Alaska and the North Sea increased and it was believed that this increase would continue over the long-term. Yet despite expectations, it declined. Likewise, there is the possibility of shale oil becoming increasingly difficult and costly to extract. Can these challenges be overcome through technological innovation?
As shale oil development trends are rather uncertain, it is possible that the upward trend in crude oil prices will continue.
Prep for $100 per barrel needed
Q: What will become of global crude oil supply and demand in the mid- to long-term?
A: In the mid- to long-term, crude oil prices will likely fluctuate within the $30-$100 per barrel range. If prices surpass $100 per barrel, countries throughout the world will make rapid progress on energy-saving initiatives and shift away from oil dependence. On the other hand, if prices fall below $30 per barrel, high-cost oil extraction will become unprofitable in countries such as Canada, and production will grind to a halt.
Global demand for crude oil is likely to grow for at least the next 10 years. This is because economic growth in emerging economies including China and India will spur demand in sectors such as transportation and chemicals. Although some believe that the demand for oil will decrease due to the spread of electric vehicles, it will take a considerable amount of time to be fully implemented. One of the major challenges is the high costs of setting up necessary infrastructure such as charging stations.
On the supply side, OPEC leader Saudi Arabia is attempting to diversify its economy by cultivating industries including logistics, telecommunications and manufacturing. However, Riyadh has not stated that it would reduce crude oil production.
Q: How should Japan respond?
A: Japan needs to prepare for situations in which crude oil prices possibly rise to a level approaching $100 per barrel.
Crude oil prices have a limited adverse effect on the economy as long as they stay below $70 per barrel. The average price of regular gasoline is currently just over ¥140 per liter, but things will become considerably more difficult if the price were to increase to ¥150 or ¥160.
Japan should work on diversifying supply sources as well as developing and implementing energy-saving technologies and measures with countries such as China and India.
Although Japan has emergency reserves to last about 220 days, many emerging Asian economies don’t have enough stockpiles. It is also important to support the setup and maintenance of the necessary facilities. I believe that oil importers have an international responsibility to properly prepare for future risks.
Chief Economist of
the Japan Oil, Gas and Metals
Graduated from Waseda University’s School of Political Science and Economics, and earned a master’s degree at a graduate school belonging to the French Institute of Petroleum. After working at the International Energy Agency and various other companies and agencies, he took up his current position in 2015.