IEEJ：March ©IEEJ 2023
Special Bulletin
A Japanese Perspective on the International Energy Landscape (627)

March 10, 2023

Crude Oil Prices Shaken by U.S. and Chinese Economic Outlooks
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn March 7, markets were rattled by Federal Reserve Chairman Jerome Powell’s remarks
on interest rate hikes. In his testimony at the Senate Committee on Banking, Housing and Urban
Affairs, Powell recognized that inflationary pressure is higher than assumed. Citing economic
conditions and data, he indicated that the Fed is ready to accelerate interest rate hikes and that the final
policy interest rate level could be higher than earlier projected.
Since the Fed began to raise interest rates in response to growing inflation at a meeting of
the Federal Open Market Committee in March last year, it has continued to increase interest rates
substantially. Last June, the Fed decided on an unusually large increase of 75 basis points in the federal
funds rate. Last November, it adopted the same hike for the fourth consecutive FOMC meeting. Later,
the Fed narrowed the hike. In February, the rate hike decelerated to 25 basis points. However, the latest
remarks by Powell have led market participants to anticipate that the Fed at a March 21-22 FOMC
meeting may accelerate the hike again to 50 basis points
Naturally, markets responded strongly to Powell's remarks on interest rate hikes. The stock
market plunged on concern that the U.S. economy would be affected. The Dow Jones average on theNew York Stock Exchange lost 575 points or 1.7% to 32,856. The S&P500 index slipped below thepsychologically important level of 4,000 to 3,986. The foreign exchange market also moved. Thedollar rose above 137 yen. In response to concern on U.S. economic deceleration, crude oil futures
prices took a plunge. The front-month futures contract on West Texas Intermediate suffered a sharp
fall of $2.88 per barrel or 3.6% from the previous day to $77.58/bbl. In London, the front-monthfutures contract on Brent lost $2.89/bbl to $83.29/bbl.
Later, stock and crude oil prices dropped further. The Dow Jones average fell to 32,255 on
March 9. The key WTI futures price sank to $75.72/bbl and the Brent futures price to $81.59/bbl. The
heavy stock and crude oil price plunges indicated how far markets were affected by economic outlooks
for the United States as the world’s largest economy and oil consumer. For the immediate future,market players will closely watch the next FOMC meeting decision that could trigger newdevelopments.
In the first half of 2022, crude oil prices almost remained above $100/bbl, including thehighest levels since the global financial crisis recorded in early March. In the second half, however,
crude oil prices followed a downtrend on concern about global economic deceleration amid U.S. andEuropean interest rate hikes. In response to the downtrend, the OPEC-plus group of oil-producing
countries began to cut production. It launched a substantial production cut in November, preventing
crude oil prices from falling persistently. Since the second half of last November, Brent and WTI haveremained in a narrow range between $70/bbl and $90/bbl.
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Crude oil prices’ four-month stay in the $70-90/bbl range may be attributable to a sensitivebalance among various factors. Western countries introduced a cap on Russian crude oil prices in
December and ceilings on Russian petroleum products prices in February, while falling short ofaffecting the overall oil supply so much.
On the other hand, concern about global economic deceleration has continued to exert
downside pressure on crude oil prices. Global economic growth this year is predicted to decelerate to2.9% from last year’s 3.4%. However, crude oil prices are supported by market speculation that ifcrude oil prices decline on downside pressure, the OPEC-plus group may respond. The present crude
oil price levels may be viewed as being within a tolerable range for the OPEC-plus group in varioussenses.
For oil-producing countries, higher crude oil prices mean higher revenue. As various
spending needs increase, rather than tolerating lower crude oil prices, oil-producing countries maypursue higher prices. If crude oil prices rise substantially from the current levels, however, major oilconsuming countries including the United States and European countries may increasingly urge theOPEC-plus group to increase production. For Saudi Arabia and other major oil-producing countries
that need careful consideration to prioritize relations with the United States, extremely high crude oil
prices can trigger complex problems including consideration to and response to political issues. In thissense, the current crude oil price levels may be viewed as based on a strange balance among various
factors.
Under such macroeconomic conditions accompanied by the sensitive balance of various
factors, crude oil prices have seesawed. Apparently, however, two key factors have arisen recently tomove oil prices under the strange balance. The first is the U.S. economic trend discussed at the outsetof this report. Speculation on interest rate hikes based on the remarks of Fed Chairman Powell wasrecognized as a downside risk factor. For the immediate future, crude oil prices may nervously reactto U.S. economic and financial market trends.
The second factor is Chinese economic trends. If the Chinese economy recovers and expands
towards the second half of 2023, upside pressure may grow on crude oil and other energy prices. Since
the beginning of this year, the Brent futures price rose above $85/bbl three times apparently in response
to market players’ perception on China’s energy demand and import expansion.
China’s economic growth in 2022 decelerated sharply from 8.4% in the previous year to3.1%. Under the tough zero-COVID policy, the economy lost strength, leading energy demand todecline. According to the International Energy Agency’s monthly Oil Market Report, China’s oildemand in 2022 decreased by 0.42 million barrels per day from the previous year to 15.02 million bpd,
the first decline in 32 years. Demand falls were not limited to oil. Natural gas and coal demand in 2022
slipped below the levels seen in the previous year. China gave priority to domestic energy productionin the year in pursuit of a stable energy supply, leading energy imports to decline faster than energy
demand. This was significant for international energy markets. If China’s energy imports in 2022
remained unchanged from the previous year, energy price spikes last year could have been sharper.
China lifted the zero-COVID policy late last year, leading to an explosive increase in
COVID-19 infections. No optimism can be warranted on the increase’s impact and future
developments. However, recent talks say that the Chinese economy may recover and get on a growth
path towards the second half of this year. At the National People’s Congress convened on March 5, aneconomic growth target for 2023 was set at around 5%. President Xi Jinping in his third term may give2

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top priority to economic recovery and take various economic stimulus measures. Depending on theChinese economic trends, upside pressure may arise on crude oil prices. China’s liquefied natural gas
imports are expected to turn up this year after plunging 20% in the previous year. Attention should bepaid to China’s LNG import trend and its impact as well.
For the immediate future, international energy markets may be influenced by U.S. andChinese factors. Depending on the balance between the impacts of the two factors, prices may fluctuate
wildly. I would like to pay attention to future developments.
Contact: report@tky.ieej.or.jp
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