Outlook of the International Oil Situation

The Institute of Energy Economics, JapanSecretary-General, The Oil Information CenterYoshihiro Hashizume

432nd Forum on Research Works July 23, 2019

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Key points of this report

While global oil demand in 2019 was 100.3 million b/d, total supply was 100.2 million b/d, comprising non-OPEC production of 64.4 million b/d and OPEC production of 35.8 million b/d, partly due to a decline in production in Iran, Venezuela, and other countries. On the other hand, although supply pressure is expected to increase by 2020 due to an increase in non-OPEC production particularly in the United States, demand and supply will be balanced at a level of about 101 million b/d to 102 million b/d through OPEC-plus adjustments.

Based on the abovementioned premise of demand and supply balance, and if the impact of geopolitical risks and other factors are not taken into consideration, Brent prices are expected to move in the range of $60 – 70/bbl on the average for the second half of 2019. The price level will remain generally the same in 2020, and prices will remain low within a range of fluctuation. The main factors that can cause significant changes to this price outlook include supply disruptions and geopolitical risks such as tensions surrounding the Iran situation, which could lead to an increase in prices, and macroeconomic risks such as intensification of the U.S.-China trade war, which could cause prices to drop. In the high-price scenario with emerging geopolitical risks, prices are expected to reach the high level of $15/bbl from the standard level; in the low-price scenario with growing macroeconomic risks, prices are expected to reach a low of $10/bbl from the standard level.

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Oil demand: Sluggish growth

Demand for the second quarter of 2019 increased by 0.8 million b/d (0.8%) year-on-year to 99.6 million b/d. Growth in demand has slowed down due to the sluggish growth of the global economy, but is expected to increase

from the second half of 2019. 2

Demand Changes in demand (Year-on-year comparison)

Source: IEA “Oil Market Report”

0

20

40

60

80

100

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2016 2017 2018 2019

その他

中東

他アジア

中国

OECDアジアオセアニア

OECD欧州

OECD米州

mb/d

-1

0

1

2

3

1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q

2016 2017 2018 2019

mb/d

その他

中東

他アジア

中国

OECDアジアオセアニア

OECD欧州

OECD米州

Other

Middle East

Other, Asia

China

OECDAsia, Oceania

OECD Europe

OECD Americas

Other

Middle East

Other, Asia

China

OECDAsia, Oceania

OECD Europe

OECD Americas

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Oil supply: Fall in OPEC production despite increase in production in North America

Production volume for the second quarter of 2019 increased by 0.8 million b/d (0.8%) year-on-year to 100.1 million b/d. Despite the increase in production in North America, average production for 2019 remained at the level of 100.2 million b/d

due to coordinated production cuts since January and other factors. 3

Production volume Changes in production volume (Year-on-year comparison)

Source: IEA “Oil Market Report”

0

20

40

60

80

100

120

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2016 2017 2018 2019

その他

OPEC

アフリカ

中南米

中国

旧ソ連

OECDアジアオセアニア

OECD欧州

OECD米州

mb/d

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q

2016 2017 2018 2019

mb/d その他

OPEC

アフリカ

中南米

中国

旧ソ連

OECDアジアオセアニアOECD欧州

OECD米州

Other

Africa

Central and South America

China

OECDAsia, Oceania

OECD Europe

OECD Americas

Former Soviet Union

Other

Africa

Central and South America

China

OECDAsia, Oceania

OECD Europe

OECD Americas

Former Soviet Union

OPEC OPEC

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Coordinated production cuts by OPEC-plus: Stronger efforts to cut production since January

Due to stronger efforts to cut production, the production volume of OPEC-plus countries in the first quarter of 2019 fell significantly by 2.3 million b/d (4.2%) year-on year to 54.5 million b/d.

Qatar’s withdrawal from OPEC and fall in production accompanying economic sanctions on Iran and Venezuela are also reasons for the fall in production. 4

Production volume

Source: IEA “Oil Market Report”, OPEC “Monthly Oil Market Report”

0

10

20

30

40

50

60

70

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2016 2017 2018 2019

OPEC 非OPEC減産参加国

mb/d

-4

-3

-2

-1

0

1

2

3

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2016 2017 2018 2019

OPEC 非OPEC減産参加国

mb/d

Changes in production volume (Year-on-year comparison)

Non-OPEC countries participating in production cut

Non-OPEC countries participating in production cut

OPECOPEC

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OPEC and non-OPEC Ministerial Meeting: Coordinated production cuts to be extended by 9 months

With the renewal of the production cut agreement, it is expected that full compliance will continue to be attained. This agreement was decided on substantively in a meeting between President Putin and Crown Prince Mohammad at

the G20 Summit despite opposition from Iran, and with the adoption of the Cooperation Charter as well, drew attention to the deepening relationship between Russia and OPEC. 5

Press conference after the meetingSource: OPEC HP

Developments surrounding coordinated production cuts

Sep 2016

Dec 2016

Jun 2017Nov 2017

Spring 2018Jun 2018

Nov 2018Dec 2018

Jan 2019May 2019

Extraordinary Meeting of the OPEC Conference, agreement on production cut policyAgreement on coordinated production cuts of 1.8 million b/d, based on“Declaration of Cooperation.” 6 countries including Saudi Arabia cut diplomatic ties with QatarExtension of coordinated production cuts till end of 2018Realization of demand-supply rebalance (average level for past 5 years)Agreement to ease production cuts (response to sanctions on Iran, etc.)Embargo on import of oil produced in Iran (8 countries excluded)Agreement to cut production by 1.2 million b/d (from actual production in October)Qatar withdraws from OPEC/Conflict in VenezuelaIntensification of U-S.-Iran confrontation, suspension of exclusion from import embargo

[Main agreements reached at OPEC and non-OPEC Ministerial Meeting (July 2)]1． Extension of agreement on production cut (Dec 2018) for nine months till end of

March 20202． Adoption of Cooperation Charter on the framework of OPEC-plus3． Next meeting to be held on December 6, 2019 (OPEC General Meeting on

December 5)

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Iran’s oil exports: Possibility of further reduction

Exports increased temporarily in the first quarter of 2019, mainly to Japan and ROK, due to the temporary stay on the embargo on oil imports from Iran.

Production volume of 2.4 million b/d and exports falling to 0.8 million b/d in May 2019? Possibility of further reduction. 6

Source: Prepared based on Trade Statistics and MEES

0

1

2

3

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 4

2016 2017 2018 2019

中国 インド 日本 韓国 台湾 トルコ EU

mb/d

China India Japan ROK Taiwan Turkey EU

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Oil demand and supply in the U.S.: Trend of continued increase in production

Production volume for the first quarter of 2019 increased by 1.6 million b/d (15.7%) year-on-year to 11.8 million b/d, while demand increased by 0.1 million b/d (0.5%) year-on-year to 20.3 million b/d.

EIA predicts an increase in production of 1.4 million b/d from 2018 to 2019. 7

Source: EIA statistics, Baker Hughes “North America Rig Count”

Production volume/No. of rigs in operation Demand by product

0

200

400

600

800

1,000

1,200

0

2

4

6

8

10

12

14

Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1 4

2015 2016 2017 2018 2019

シェールオイル 在来型 リグ稼働数

mb/d リグ稼働数

0

5

10

15

20

25

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 4

2016 2017 2018 2019

LPG 石化原料 ガソリン ジェット 軽油 重油 その他

mb/d

Shale oil Conventional No. of rigs in operationPetrochemical

materialsGasoline Jet fuel Diesel Fuel oil Other

No. of rigs in operation

LPG

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China’s oil demand: Signs of a slowdown

Demand for the first quarter of 2019 increased by 0.6 million b/d (5.0%) year-on-year to 13.1 million b/d. New vehicle sales volume slowed down, falling by 0.9 million units (13.0%) year-on-year in the second quarter of 2019 to 6 million units.

The pace of demand growth is expected to fall as a result of a slowdown in economic growth. 8

Source: APEC “EGEDA Database”, China Association of Automobile Manufacturers statistics

New vehicle sales volumeDemand by product

0

2

4

6

8

10

12

14

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2016 2017 2018 2019

LPG ガソリン 灯油 軽油 重油 その他

mb/d

0

2

4

6

8

10

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2016 2017 2018 2019

他乗用車 SUV 商用車

100万台

Gasoline Kerosene DieselFuel oil Other

Other passenger vehicles

Commercial vehicles

LPG SUV

Million units

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U.S.-China trade war and oil trade between the two countries

In the first quarter of 2019, among China’s crude oil imports, the volume of crude oil imported from the U.S. fell significantlyfrom 4% in the previous year to 0.1%. Among U.S. crude oil exports, the volume exported to China fell dramatically from 23.4%in the previous year to 2.9%. China is moving forward on switching mainly to Saudi Arabia as its alternative supplier, while theU.S. is moving forward on switching to ROK and other countries as its alternative supply destination.

If the trade friction between the U.S. and China intensifies or becomes prolonged, it could also have an impact on other economies, and possibly bring about a decline in demand and give rise to the risk of pushing down prices.

9

Source: EIA statistics, China OGP, OPEC statistics

China’s crude oil imports U.S. crude oil exports

0

2

4

6

8

10

12

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 4-5

2016 2017 2018 2019

サウジアラビア イラン他中東 アフリカ欧州・旧ソ連 米国他米州 アジア・オセアニア

mb/d

0.0

0.5

1.0

1.5

2.0

2.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 4

2016 2017 2018 2019

日本 韓国 中国 その他アジア 米州 欧州 その他

mb/d

Saudi Arabia

Other, Middle East

Europe, former Soviet Union

Other, Americas

Iran

Africa

United States

Asia, Oceania Japan ROK China Other, Asia Americas Europe Other

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Inventory: Marginally above the average for the past five years

OECD commercial inventory level in May 2018 increased to a level marginally above that of the average of the past five year.

Despite increase in production by the United States, production cuts by OECD-plus and other factors may contribute to a fall in inventory level in the second half of 2019. 10

Source: IEA “Oil Market Report”

2,400

2,600

2,800

3,000

3,200

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2014-2018レンジ 2014-2018平均 2010-2014平均 2018 2019

mb

2014-2018 range 2014-2018 average 2010-2014 average 2018 2019

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Forecast of GDP growth rate: Slowdown in 2019, slight recovery in 2020

0%

1%

2%

3%

4%

5%

6%

7%

8%

2017 2018 2019 2020

世界 米国 ユーロ圏 中国 日本

成長率

11

According to IMF’s forecast for GDP growth, a slowdown is predicted across the board for 2019, with global growth rate at 3.3% (against 3.6% in the previous year). This is expected to recover slightly in 2020 at 3.5%.

IMF’s forecast for global growth in 2019 was revised downward from the October 2018 forecast of 3.7%.

Growth rate

World U.S. Eurozone China Japan

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Financial markets

Both oil prices and stock prices recovered with the decrease in risk aversion, and U.S. stock prices hit a record high on July 15.

U.S. dollar is moving within a relatively low range due to expectations of a cut in U.S. interest rates. 12

Source: FRB statistics

Oil prices and stock prices Oil prices and exchange rates

14,00015,00016,00017,00018,00019,00020,00021,00022,00023,00024,00025,00026,00027,00028,00029,000

20

30

40

50

60

70

80

Jan-

16Ap

r-16

Jul-1

6Oc

t-16

Jan-

17Ap

r-17

Jul-1

7Oc

t-17

Jan-

18Ap

r-18

Jul-1

8Oc

t-18

Jan-

19Ap

r-19

Jul-1

9

WTI Dow 30

$/bbl $

100

105

110

115

120

125

20

30

40

50

60

70

80

Jan-

16Ap

r-16

Jul-1

6O

ct-1

6Ja

n-17

Apr-

17Ju

l-17

Oct

-17

Jan-

18Ap

r-18

Jul-1

8O

ct-1

8Ja

n-19

Apr-

19Ju

l-19

WTI 米ドルインデックス

$/bbl 米ドルインデックス

U.S. Dollar Index

U.S. Dollar Index

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The net long range for non-commercial traders recovered slightly after the start of the year, but resumed the downward trend once again. 13

Source: CFTC, ICE

WTI Brent

0

10

20

30

40

50

60

70

80

90

-1000000

-500000

0

500000

1000000

2016年

1月

2016年

4月

2016年

7月

2016年

10月

2017年

1月

2017年

4月

2017年

7月

2017年

10月

2018年

1月

2018年

4月

2018年

7月

2018年

10月

2019年

1月

2019年

4月

2019年

7月

非当業者ネットロング 当業者ネットショート WTI価格

契約枚数 WTI価格 ($/bbl)

0

10

20

30

40

50

60

70

80

90

-800000

-600000

-400000

-200000

0

200000

400000

600000

800000

Jan-

16

Apr-

16

Jul-1

6

Oct-

16

Jan-

17

Apr-

17

Jul-1

7

Oct-

17

Jan-

18

Apr-

18

Jul-1

8

Oct-

18

Jan-

19

Apr-

19

Jul-1

9

非当業者ネットロング 当業者ネットショート

Brent価格 非当業者ネットロング

当業者ネットショート Brent価格

契約枚数 Brent価格 ($/bbl)契約枚数 Brent価格 ($/bbl)

Futures position

WTI prices ($/bbl)No. of contracts No. of contracts Brent prices ($/bbl)

Non-commercial traders net long

Commercial traders net short

WTI prices

Non-commercial traders net long

Brent prices

Commercial traders net short

Commercial traders net shortNon-commercial traders net long

Brent prices

Jan-

16

Apr

-16

Jul-1

6

Oct

-16

Jan-

17

Apr

-17

Jul-1

7

Oct

-17

Jan-

18

Apr

-18

Jul-1

8

Oct

-18

Jan-

19

Apr

-19 Jul-1

9

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For 2019, average demand was 100.3 million b/d and average supply was 100.2 million b/d. For 2020, demand and supply are expected to reach a balance at an average level of 101 million b/d to 102 million b/d.

Although there was a slight tightening in the second half of 2019 due to factors such as the coordinated production cuts, there is a possibility of a balance in the first half of 2020 due to increased production by the U.S. and other factors.

14

Forecast of demand-supply balance: Slight tightening in the second half of 2019

9092949698

100102104

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2017 2018 2019 2020

需要

供給

mb/d -2-101234

需給バランス

mb/d

Demand-supply balance

Demand

Supply

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International crude oil prices (Brent) are expected to be at the level of $60 – 70 in the second half of 2019. The price level is expected to remain generally the same in 2020, with prices staying at a low level within a range of fluctuation.

The main elements of uncertainty include geopolitical risks such as the heightening of tensions surrounding the Iran situation, disruptions to supply, and macroeconomic risks such as the intensification of the U.S.-China trade war. 15

Forecast of crude oil prices: $60 – 70 for the second half of 2019

0

20

40

60

80

100

120

Jan

16Ma

r 16

May 1

6Ju

l 16

Sep

16No

v 16

Jan

17Ma

r 17

May 1

7Ju

l 17

Sep

17No

v 17

Jan

18Ma

r 18

May 1

8Ju

l 18

Sep

18No

v 18

Jan

19Ma

r 19

May 1

9Ju

l 19

Sep

19No

v 19

Jan

20Ma

r 20

May 2

0Ju

l 20

Sep

20No

v 20

$/bbl

WTI ブレント ドバイ

米減産 米増産

OPECプラス協調減産

イラン核制裁解除

米、イラン核合意離脱、ベネズエラに追加制裁

イラン石油制裁適用除外終了

米利上げ

減産延長？

米大統領選挙

世界経済減速？

Brent Dubai

U.S. cuts production U.S. increases production

Coordinated production cuts by OPEC-plus Extension of coordinated production cuts?

U.S. withdraws from Iran nuclear deal, imposes additional sanctions on Venezuela

End of exclusions for Iran oil sanctions

U.S. presidential elections

Lifting of Iran nuclear sanctions

U.S. increases interest rate

Deceleration in global economy?

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East-West PipelineLength: Approx. 1200kmCapacity: 5 million BDBarrels per day: 2.1 million BD

High-price scenario: Heightened geopolitical risks

Abu Dhabi PipelineLength: Approx. 370kmCapacity: 1.5 million BDBarrels per day: 0.6 million BD

Recent confrontation between U.S. and Iran

Jul 2015May 2018Aug 2018Nov 2018

Apr 2019

May 2, 2019

May 5, 2019

May 8, 2019

May 12, 2019May 14, 2019May 24, 2019

Jun 13, 2019Jun 20, 2019Jun 24, 2019

Iran nuclear deal enactedU.S. announces withdrawal from nuclear dealResumption of economic sanctions on IranEnforcement of oil import embargo postponed for 180 daysIslamic Revolutionary Guard Corps recognized as terrorist organizationPostponement of oil import embargo enforcement cancelled U.S. military dispatches aircraft carriers and bombersIran partially suspends fulfilment of nuclear dealFour tankers explode off the coast of FujairahAttacks on Saudi pipelineIncreased dispatch of 1,500 personnel from U.S, militaryTwo tankers explode on the Gulf of OmanIran shoots down U.S. droneU.S. strengthens sanctions on Iran

Attention drawn to explosions not at the Strait of Hormuz, but near the exit and the bypass pipeline. Although it is difficult to imagine that the Iranian government would block the strait, in the high-price scenario in which geopolitical risks emerge, such as concerns of a military clash caused by incidental events, prices are expected to reach the high level of $15/B.

May 14

May 12

Jun 13

Strait of Hormuz

Strait of Hormuz：World’s largest strategic point for oil transportation

21 million barrels/day of oil being transported (2018)Approx. 80% of Japan’s oil imports pass through

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Low-price scenario: Heightened macroeconomic risks

【Main macroeconomic risks】１ U.S-China trade war

Concerns of intensification and prolonging of the situation; resolution is expected to taketime.The Chinese economy is already showing signs of a slowdown, with sluggish growth inoil demand.Going forward, there are concerns of significant impact on the economies of relatedcountries such as Japan, ROK, and EU.

１ BrexitBrexit will have an impact not only on the British economy, but on the overall economyof Europe.In particular, Europe’s economy will be thrown into a state of confusion in the event of a“no-deal Brexit.”

【Downward revision of global oil demand】EIA short-term forecast (June):Growth for 2019 at 1.4 million BD year-on-year⇒1.2 million BDIEA Oil Market Report (June) ：Growth for 2019 at 1.3 million BD year-on-year⇒1.1 million BDDownward revision for two consecutive months, 1.4 million BDuntil the April report

【Downward revision of forecast of crude oilprices】EIA short-term forecast (June): Brent

3rd quarter $73/B⇒＄67/B4th quarter $70/B⇒＄68/B

Bank of America Merrill Lynch (Jun 14) :Brent

Second half of 2019＄68/B⇒＄63/B

In the low-price scenario with heightened macroeconomic risks, prices are expected to reach the low level of $10/B.

Contact :report@tky.ieej.or.jp