IEEJ：April ©IEEJ 2022
Special Bulletin
A Japanese Perspective on the International Energy Landscape (578)

April 1, 2022

1Q Brent Average Up 60% to $97.90/bbl
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Crude oil prices shot up year on year in the first quarter of 2022. The average daily closing
price of the front-month futures contract in the quarter came to $97.90 per barrel for Brent, up$36.60/bbl or 60% from a year earlier, and to $95.01/bbl for West Texas Intermediate, up $36.87/bbl
or 63%. Quarterly average crude oil prices thus rose close to $100/bbl for the first time since the thirdquarter of 2014. In the first quarter this year, crude oil prices featured not only substantial year-onyear hikes but also wild fluctuations. Brent ranged from $78.98/bbl on January 3 to $127.98/bbl onMarch 8, indicating a fluctuation of as much as $50/bbl. WTI ranged from $76.08/bbl to $123.70,
posting a fluctuation close to $50/bbl. These fluctuations are of daily closing prices. Temporarily, Brent
soared above $139/bbl on March 7. While gaps between the lowest and highest prices were wide, daily
closing price changes exceeded $5/bbl on 11 market days in March As daily changes sharpened fromlate February. On more than a half of market days in March, prices posted extremely sharp changes.
Price volatility was unprecedentedly high.
As a matter of course, the biggest factor behind the wild oil price fluctuations was the impactof the Ukraine crisis on the international oil market. Following oil prices’ uptrend from the second halfof 2021, prices accelerated their rise on speculation that the crisis could affect oil and gas exports fromRussia, which accounts for 11% of global oil exports and 25% of global gas exports in 2020.
Particularly, news about the United States’ embargo on Russian oil exports exerted a great impact on
the market. As U.S. Secretary of State Antony Blinken indicated a potential embargo on March 6, oilprice hikes gained momentum. On March 7, oil prices temporarily topped $130/bbl to the highest
levels since the global financial crisis. On March 8 when oil prices posted the highest closing levelsin the January-March quarter, the United States announced the embargo, with President Joe Bidensigning an executive order to this effect. After launching a military invasion into Ukraine on February
24, Russia has attacked major Ukrainian cities including the capital city of Kyiv. As Ukrainian forces
have fought against Russian forces, the Ukraine war has lasted for more than one month. Civilian
deaths have been massive, while millions of refugees have fled to neighboring countries in a serious
humanitarian crisis. In response, the international community, including Western countries, has urged
Russia to immediately stop the invasion and withdraw its troops from Ukraine. Western countries havealso imposed unconventionally tough economic sanctions on Russia. Under growing tensions, market
players have been concerned that Russian energy exports and supply could be disrupted. Such concern
has triggered crude oil and natural gas price spikes.
On the day after hitting the highest level on March 8, the benchmark oil price posted a sharp
decline of nearly $17/bbl to $117.14/bbl. Even after the rapid drop, the price was still high above$110/bbl. Behind the sharp downturn, market players seemingly acknowledged that the U.S. oil
embargo joined by U.K. and Canadian embargoes would not have serious direct impacts on Russiancrude oil supply because of the three countries’ light dependence on Russian oil. They also understoodthat Germany and other major European countries that depend on Russian oil refrained from imposing
an embargo on Russian oil. Given these points, the risk premium that pushed up oil prices disappeared,
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IEEJ：April ©IEEJ 2022
leading oil prices to fall back.
Even amid oil price hikes, other various factors exerted influence on oil prices. For instance,
the United Arab Emirates’ reported indication of a positive attitude towards expanding oil production
in response to price hikes led to a sharp oil price fall. Later, oil prices rose back on speculation that theUAE would give priority to its cooperation with the other members of the OPEC-plus group of oilproducing countries. Oil prices came under upward pressure when market players speculated thatSaudi Arabia, which holds the key to increasing OPEC-plus production, remained cautious ofaccepting U.S. and European requests for an increase in oil production partly because of reported
complication and difficulties in U.S.-Saudi relations. Regarding the Middle East situation, the Irannuclear talks might have some impacts on oil prices. When market participants speculated that thetalks made progress towards agreement, oil prices came under downward pressure despite thepossibility that Iran’s comeback to the international oil market may come later in the second half of
this year even if a nuclear deal is cut soon. When media reports stated that it would be difficult for theIran nuclear talks to produce any agreement due to a new Russian request, upward pressure wasexerted on oil prices. The situation of Middle Eastern oil-producing countries has thus had some
impacts on crude oil prices in the first quarter of this year.
On the other hand, developments in oil-consuming countries have also shaken crude oilprices. First, the spread of COVID-19 infections in China known for its zero corona policy has exerteda major impact on crude oil prices. As a lockdown began on the COVID-19 spread in Shanghai, crude
oil prices came under downward pressure in late March on growing speculation that oil demand andimports in the world’s largest oil-importing country would be affected. Future economic trends and oil
demand in China have potential to push up or down crude oil prices. Second, news about a U.S. plan
to release strategic petroleum reserves again has had a great impact on crude oil prices. On March 31,
the United States announced that it would release 1 million barrels per day or up to 180 million barrels
toward the second half of this year. This is a record SPR release. The United States plans to promote
cooperation with its allies to expand the global reserve release to lower crude oil and gasoline prices.
The U.S. announcement led the WTI price to plunge by more than $7/bbl from the previous day. Thus
various factors have had great impacts on the oil market.
This is because no new major developments have recently come in regard to the direct
impacts on oil market due to the Ukraine crisis and concern on future Russian energy supply. However,
we must pay attention to the Ukraine crisis and potential disruptions to oil supply as the mostinfluential factors for crude oil prices. I here would like to boldly provide three potential scenarios. In
the first scenario, the military invasion and economic sanctions will continue, with geopolitical risks
remaining high, in the absence of major energy supply disruptions. In this case, crude oil prices willfluctuate in a core range between $100/bbl and $110/bbl and deviate by up to $20/bbl from the coreunder pressure from geopolitical risks and other influential factors. In the second scenario, serious oil
supply disruptions will trigger crude oil prices’ upsurge to record-high levels. In response, Middle
Eastern oil-producing countries will increase production, with oil-consuming countries releasing oil
reserves further, exerting downward pressure on oil prices. Basically, however, oil prices will be far
higher and more volatile than at present. In the third scenario, a cease-fire agreement will be achieved
to gradually stabilize the Ukraine situation. Crude oil prices will then fall to a core range between$70/bbl and $80/bbl. This range, seen in the second half of last year, is not necessarily low.
Great uncertainties exist about future crude oil prices. With various potential oil market
developments in mind, we will have to keep close watch on the Ukraine crisis and the international oilsituation.
2Contact: report@tky.ieej.or.jp
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