TOKYO -- International crude oil prices briefly fell below $30 per barrel in January, touching a 12-year low. With prices continuing to sag, companies and countries are being forced to change the status quo.
The Nikkei spoke with Takashi Tsukioka, CEO at Idemitsu Kosan, a major Japanese oil refiner, about the future direction of crude prices, the outlook for shale oil players and industry realignments in Japan.
Q: Oil prices are showing no signs of bottoming out. What do you make of this?
A: From a long-term perspective, the current level is too low. However, the crude market has reached saturation, with global inventories having piled up. In situations like this, declines in crude prices tend to accelerate in the short term. In the U.S. futures market, which has influence in forming international prices, selling pressure from speculators is drawing particularly keen attention.
Q: Some major oil-producing nations have begun making moves to stop increasing output. What do you think will happen next?
A: Some oil-producing nations, including Saudi Arabia, have agreed to freeze production [at January levels]. Driving that move is the fact that some of those countries, including Venezuela and Russia, have been pushed into a corner due to financial difficulties. But there is little possibility of a cooperative production cut by OPEC and non-OPEC members.
The current situation is similar to what happened from 1985 through 1986. Around that time, the North Sea oil field and other new resources expanded their presence. Saudi Arabia stopped playing a role in adjusting the supply-demand balance. This time, Russia raised its oil production, while shale oil development -- mainly in the U.S. -- made progress. Even if it lost its market share, I can't see Saudi Arabia reducing its production.
Q: Do you think the answer to the supply-demand balance lies in the shale oil sector?
A: Shale oil development and production costs have fallen. That said, shale oil companies are losing their profitability. From now on, I predict that shale oil companies facing financial difficulties will come under the umbrella of major petroleum companies, and major companies will take the initiative in cutting production. That said, given how large inventories have become, even if a good balance is achieved between supply and demand, it will take time for [crude] prices to recover. It will take at least a year.
Q: To what extent do you think oil prices will recover?
A: Considering the cost of developing oil fields, prices will probably rise to around $40-50 [a barrel]. Further rises will depend on developments in the global economy. Given the economic disturbances in China and other emerging countries, stock markets are sensitive to oil prices.
Q: Japan's oil industry has been undergoing a realignment. In July last year, Idemitsu Kosan and Showa Shell Sekiyu announced a basic agreement to merge. What challenges does the industry face?
A: Amid shrinking domestic demand, if the oil industry is to maintain profitability, it must remedy the problems of excess capacity, excessive competition and a complex distribution structure. It is also important to create a fair and highly transparent price indicator under the leadership of, for example, the Tokyo Commodity Exchange. The entire industry needs to make efforts to be more competitive. Mergers among refiners are part of those efforts.
Interviewed by Nikkei senior staff writer Tomio Shida