IEEJ：July 2019○ｃIEEJ 2019
Special Bulletin
A Japanese Perspective on the International Energy Landscape (436)July 10, 20192019 First Half Average Brent Price Down $5 to $66.14
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Brent crude futures prices (the front-month contract’s daily closing prices) averaged $66.14
per barrel in the first half of 2019, down about $5/bbl from the same period of last year. The highest
level in the six-month period was at $74.57/bbl on April 24 and the lowest at $54.91/bbl on January 2.
For the other benchmark crude oil brand of West Texas Intermediate, the average futures price came
to $57.45/bbl, down about $8/bbl. The highest level in the period was at $66.30/bbl on April 23 andthe lowest at $46.54/bbl on January 2. The following reviews crude oil price trends in the first half
and analyze future trends:
As indicated by the low for Brent in the six-month period, the year 2019 began after Brent
fell close to $50/bbl on growing concerns about oversupply and global economic deceleration in
December 2018. Fearing crude oil prices’ further fall, the Organization of the Petroleum ExportingCountries and some of the non-OPEC oil-producing countries decided to jointly cut their oilproduction by 1.2 million barrels per day from the beginning of 2019 and implemented the decision.
In response, the oil supply-demand balance tightened gradually from the beginning of the year, paving
the way for crude oil prices to enter an uptrend. The slow, steady uptrend lasted until April, allowing
Brent to rise back above $70/bbl for the first time in five months, since November 2018.
Accelerating the uptrend was the United States’ announcement of a policy seeking to impose
a full oil embargo on Iran. While withdrawing from the Iran nuclear deal in May 2018, the UnitedStates granted a 180-day waiver from November 2018 on an Iran oil embargo for eight countries
including Japan. In late April 2019, however, Washington vowed to repeal the waiver and impose thefull Iran oil embargo from May. Amid concerns about a substantial fall in Iranian crude oil exports andgrowing tensions over Iran, crude oil prices rose further. Brent hit the first half’s high of $74.57/bbl
on April 24. Some market participants then expected to see Brent topping $80/bbl and rising further.
In fact, however, crude oil prices turned down in May, entering a downtrend. The biggest
factor behind the downturn was the resurgence of the U.S.-China trade war. Although some deal
between the United States and China had been expected in late April, the U.S. President raised an
additional tariff from 10% to 25% on $200 billion worth of Chinese products in May. Furthermore,
Washington started preparations for imposing a 25% additional tariff on about $300 billion worth ofChinese goods. In response, China raised tariffs to counter the U.S. action, adopting a confrontational
approach. While some deal was expected at U.S.-China trade talks, Washington found China retreatingfrom its earlier indication of concessions, concluded that China’s concessions would not be enoughand decided to raise tariffs to increase pressure on China. This is the reason China adopted theconfrontational approach. The clash between the world’s first and second largest economies led to theresurgence of concerns about global economic deceleration risks, prompting crude oil prices to decline.
Substantial growth in U.S. shale oil production might have also exerted downward pressure on crude
oil prices.
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IEEJ：July 2019○ｃIEEJ 2019
The downtrend was reversed again by growing tensions over Iran. After Brent slipped below$60/bbl on June 12, two tankers, including a Japanese one, were attacked in the Gulf of Oman near
the Strait of Hormuz, leading crude oil prices to shoot up. Although the attacks caused no disruption
to oil supply, the oil market reacted to the risk event regarding safe passage through the strait known
as the key artery for oil transportation. Furthermore, the Iranian Revolutionary Guard shot down a U.S.
military reconnaissance drone. Tehran claimed that the drone intruded into Iranian airspace, while
Washington flatly denied the intrusion. Thus, tensions between the United States and Iran grew steeply.
Later, President Trump said that he had given a go-ahead to a retaliation for the drone shootdown andcanceled the retaliation 10 minutes before the planned implementation time. He thus indicated avolatile situation shaking the world. Amid the growingly tense Iranian situation and rising geopoliticalrisks including a potential military clash, Brent has remained around $65/bbl. As for the U.S.-China
trade war, the two countries held a summit on the occasion of the Group of 20 Osaka Summit in lateJune and agreed to resume trade talks. Washington then decided to shelve the plan to impose a 25%
tariff on $300 billion worth of Chinese goods. The market was relieved to see the avoidance of abreakoff at the bilateral summit. Given that the U.S.-China dispute is deep-rooted, however, nooptimism can be warranted about future bilateral trade talks.
In this situation, it may be significant to set branching points and develop scenarios from thebranching points in analyzing the international oil market and crude oil prices in the immediate future.
Given the growing geopolitical risks, the first branching point is whether a military clash would occur
regarding the Iranian situation. The second branching point is what the clash would be like.
In a scenario free from any military clash, oil supply and demand factors and global
economic risks would exert dominant influences on the market and crude oil prices, though with U.S.Iran tensions remaining. If oil demand increased steadily in the absence of global economic risks,
crude oil prices would remain around the current levels, with oil supply meeting demand. Although
non-OPEC oil production would increase faster than global oil demand, the OPEC-plus group would
continue supply and demand adjustment. If the global economy decelerated on the intensification ofthe U.S.-China trade war, however, crude oil prices and their fluctuation range would come underheavy downward pressure and fall by some $10/bbl or more.
If a military clash occurred and ended up as a temporary, limited one, crude oil prices andtheir fluctuation range would rise over a short term. Such clash would come in an unforeseen
circumstance and parties to the clash would exercise restraint. With efforts to avoid any expansion of
the clash gaining momentum, the clash would end up as a temporary, limited one. Even in this case,however, safe passage through the Strait of Hormuz would be affected, causing disruptions to oil
supply temporarily. After a short-term spike, crude oil prices’ fluctuation range would rise by $1020/bbl (or more depending on the seriousness of supply disruptions). If the situation were stabilizedlater, with any additional clash continuing to be avoided, developments would be close to those in theabovementioned scenario free from any military clash.
If a military clash occurred and lasted for a certain prolonged period and became a fullblown one, crude oil prices would spike substantially, with the international supply-demand balancetightening. Such military clash would occur in an unforeseen circumstance, leading to a repetition ofretaliatory attacks. The clash would expand geographically and spatially, instead of being resolved ina short span. This would be the worst scenario where safe passage through the Strait of Hormuz would
remain difficult during or beyond the duration of the clash, with oil supply disruptions growing serious.
Furthermore, the geographical, spatial expansion of the clash would lead oil production in other
Middle Eastern countries to decline on foreign companies’ withdrawal and damage to infrastructure,
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IEEJ：July 2019○ｃIEEJ 2019making oil supply disruptions even more serious. Crude oil prices then could rise beyond $100/bbl or
shoot up further depending on the greater seriousness and longer duration of supply disruptions.
The above analysis on future possibilities focuses on geopolitical risks. Factors exerting
influence on the international oil market and crude oil prices are extremely uncertain. They are difficult
to predict. Japan, which depends heavily on oil among energy sources, on oil imports and on theMiddle East, must closely watch the future oil situation and prepare a strategy to flexibly, timely andadequately respond to any relevant development.

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