IEEJ：January 2021©IEEJ 2021
Special Bulletin
A Japanese Perspective on the International Energy Landscape (515)January 14, 2021

2021 Begins with Rises in Crude Oil, LNG, and Japan’s Electricity Prices
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanThe first two weeks of the year 2021 saw a tightening supply-demand balance and pricehikes in energy markets. The key futures price of the West Texas Intermediate crude oil topped $53
per barrel for the first time in 11 months, but a tightening electricity supply-demand balance andLNG price hikes under cold waves in Japan attracted greater attention in Japan and the rest of theworld.
Energy price hikes have come at a time when there are numerous factors that make it
difficult for energy prices to rise. The COVID-19 pandemic, which was the largest factor behindenergy price weakness in 2020, has accelerated its global spread since late last year. New COVID-19
infections have been increasing at unprecedentedly high paces in Western countries and Japan. Whilea rising number of countries have launched vaccinations, no sign of an end to the COVID-19
pandemic is seen, with lockdowns and other restrictions on economic activities being reintroduced inmany countries. Japan declared a state of emergency for Tokyo and three neighboring prefectures
again on January 7 and subjected seven other prefectures to the declaration later. In such situation,
the global economy’s recovery has not been smooth. In its world economic outlook in the beginningof the year, the World Bank lowered a global economic growth projection for 2021 by 0.2 percentage
points to 4.0%. It also pointed to further downside risks, indicating that the growth could fall to 1.6%.
Nevertheless, energy prices have been generally rising, as noted above. Why? Energy markets havetheir respective reasons for price hikes.
Crude oil prices began to moderately rise last November, when the WTI price soared fromaround $40/bbl to around $45/bbl in November and rose close to $50/bbl in December. On January 6,
it finished at $50.63/bbl, topping $50/bbl at last. On January 12, the front-month WTI futurescontract closed at $53.21/bbl, topping $53/bbl for the first time in 11 months, since $53.38/bbl onFebruary 21, 2020. On the same day, the key Brent crude futures price rose beyond $55/bbl to$56.58/bbl.
There are two major reasons for crude oil price hikes even amid concerns about the serious
COVID-19 pandemic and weak economic growth. First, Saudi Arabia made a surprise offer tovoluntarily cut its production by an additional 1 million barrels per day in February and March at a
meeting of the Organization of the Petroleum Exporting Countries and non-OPEC oil-producing
countries on January 5, after the OPEC-plus group indicated a plan to narrow the OPEC-plus group’sproduction cuts by 0.5 million bpd from January. The surprise offer pushed up crude oil prices. It isspeculated that Saudi Arabia considered its relations with the incoming U.S. Biden administration in
making the voluntary offer. Undoubtedly, the surprise offer has supported crude oil prices. Second,democrats won two U.S. Senate seats from Georgia in a run-off election on January 5, securing asimple Senate majority for President-elect Joe Biden’s Democratic Party and avoiding a divided
Congress. This led market players to expect that the Biden administration could stand in a better
position to implement its economic stimulus package to ensure a U.S. economic recovery, prompting
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the Dow Jones industrial average on the New York Stock Exchange to shoot up above 31,000 for the
first time ever. Amid monetary easing, massive money flew into commodity markets, pushing up
crude oil and other commodity prices.
However, LNG price hikes early this year were more remarkable than crude oil priceincreases. Behind the LNG price hikes were strong cold waves and a tighter electricity
supply-demand balance in Japan. In Japan ranked as the world’s fifth largest electricity generator
after the United States, China, India, and Russia, the electricity supply-demand balance hasremarkably tightened under strong cold waves since late last year. A record cold wave and heavy
snowfall around the turn of the year and another strong cold wave from January 7 triggered a rapid
increase in electricity demand. Maximum demand topped an assumed once-in-a-decade level,leading the supply-demand balance to rapidly tighten. The demand rise was coupled with a decline
in solar power generation under bad weather and troubles at some thermal power plants to lower thereserve margin, or reserve power generation capacity’s ratio to demand, to fall close to the minimum
necessary level of 3% for stable electricity supply at some power utilities. The tightening
supply-demand balance brought about rapid electricity price hikes. Prices on the Japan ElectricPower Exchange skyrocketed from 10 yen/kWh in the first half of last December to more than 120
yen/kWh on January 9 and to far more than 200 yen/kWh temporarily from January 12.
The tightening electricity supply-demand balance and spot power price spikes prompted
power utilities to take all available supply-expanding measures such as additional thermal power
generation, the utilization of enterprises’ private power plants, and electricity supply arrangement
among major utility companies, while requesting users to hold down power consumption. However,they have remained in a tightrope situation to keep demand below supply. Further cold waves andunexpected troubles could make it difficult for power utilities to sustain stable power supply. No
optimism can be warranted. In concluding the power sector outlook for 2021 in my previous bulletin(514th issue), I warned that the risk is growing that heat or cold waves and other contingencies
would tighten the power supply-demand balance, as I did at a regular IEEJ forum on research work
late last year. Unfortunately, the warning has come true. Given that electricity and energy hold thekey to stabilizing civic life and economic and national management, stable electricity supply willremain a top priority for Japan and all other countries.
Record cold waves have hit not only Japan but also other Northeast Asian countries,
accelerating a seasonal LNG demand increase. Japan is the world’s largest LNG consumer, followedby China. Japan, China, and South Korea account for more than 50% of global LNG consumption.
The tightening electricity supply-demand balance led hopes to grow on LNG-fired power generationthat is highly subservient and flexible. Given LNG’s characteristics, however, LNG inventories is
extremely expensive and cannot be stocked as much as oil inventories. While hopes are growing onLNG-fired power generation, additional LNG consumption or a decline in LNG inventories isexpected to affect future LNG plant operation, exerting pressure on power utilities to procure
additional LNG. Even before the cold waves hit Japan, spot LNG prices in Asia had been rising on awinter demand increase and troubles for some LNG supply projects. The cold waves and thetightening electricity supply-demand balance since the turn of the year have increased pressure forLNG procurement to be expanded, leading spot Asian LNG prices to soar to unprecedentedly highlevels. Those prices reportedly shot up from a little more than $10 per million British thermal units
in mid-December to a record high of more than $30/MMBtu on January 12. Future price changes
will depend on additional cold waves or whether Japan’s electricity supply-demand balance would
tighten further or ease. The current high prices may be difficult to sustain over the long term.
However, the latest spot LNG price spikes have attracted attention from LNG stakeholders in the2IEEJ：January 2021©IEEJ 2021
world and led LNG market participants to recognize the importance of stable LNG supply andconsider what would be the best LNG trade contracts or pricing systems anew.
Another point that must be recognized anew is that market-based prices arecharacteristically volatile. If the supply-demand balance substantially eases, market prices may crash.
If the balance tightens for some reason, however, market prices may shoot up. While stable prices ofenergy as an indispensable good are significant for both energy consumers and producers, those whochoose to leave markets to price energy must be prepared to see and respond to price volatility.

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