IEEJ: January 2011

Special Bulletin
November 11, 2010
A Japanese Perspective on the International Energy Landscape (18)Crude Oil Prices Hit 2-Year HighKen Koyama, PhD
Director
Strategy and Industry Research Unit
Institute of Energy Economics, Japan

Crude oil price hikes have gained momentum since early November. The West Texas
Intermediate crude oil futures price closed November 7 at $87.06/barrel, the highest level in twoyears and one month, since October 8, 2008, just after the Lehman Shock.

As noted in my earlier report titled "Monetary Easing Competition and Crude Oil Prices" (AJapanese Perspective on the International Energy Landscape (13) dated October 7), the ceiling andfloor of this year's $68-86/barrel crude oil price range has been tested. The hike, as pointed out in thereport, resulted from the international financial situation where massive liquidity has been generated
under the U.S. Federal Open Market Committee's decision on November 3 on a monetary(quantitative) easing measure to purchase $600 billion in government securities and has flown into
crude oil and other commodity markets and into emerging countries.

In this sense, we can view crude oil prices as growing “bubble”. Excess liquidity has flown
into risky assets and commodities, boosting stock, crude oil and gold prices. Gold has shot up
beyond $1,400 per Trojan ounce. Meanwhile, the U.S. dollar has weakened. As far as the UnitedStates sustains its accommodative monetary policy and retains a policy of tolerating a weak dollar,
there may be no major change in the world's financial situation. Under the situation, crude oil prices
are likely to rise further.

As a matter of course, the international financial and crude oil situations are so complicatedthat crude oil prices are unlikely to post any simple or constant hike. But the above-noted overallsituation may be interpreted as indicating that crude oil prices could remain high for the immediate
future. Under such circumstances, key market players have begun to send messages regarding hikes
in perceived crude oil prices. For example, media reports in early November stated that Saudi
Arabian Oil Minister Ali al-Naimi had raised the appropriate crude oil price range from1

IEEJ: January 2011$70-80/barrel to $70-90/barrel. On November 10, the International Energy Agency announced its
World Energy Outlook 2010, giving a new policy scenario in which the benchmark crude oil pricewould rise to $113/barrel in 2009 dollars toward the year 2035. "The era of cheap energy is over,"the IEA said.

Such high price perceptions or views are based on analyses of actual market conditions.
Key market players' announcement of these perceptions can influence price perceptions of manyother market players and prices themselves. Key market players' price perceptions and actual market
prices thus have mutual relations. Actually, such relations emerged for crude oil prices. In this sense,
we may have to remain alert to messages about crude oil prices from key market players andrelevant organizations.

Meanwhile, fundamental factors for boosting crude oil prices have remained unable to befound in the supply/demand balance in international oil markets. High level oil inventories indicatethat markets have (excessively) sufficient supply. In this sense, prices are now deviating further fromreal supply/demand fundamentals. A conclusion may depend on whether we expect supply/demand
fundamentals to exert great influences on crude oil prices some time or whether any deviation would
have no problem. If we remember what happened to crude oil prices upon a plunge in global oil
demand amid a steep recession following the Lehman Shock, however, we may not be able to brush
off the importance of supply/demand fundamentals.

The international economic and financial situations have grown more complicated anddestabilized. Although I predict the United States to sustain its accommodative monetary policy,
international views about adverse effects of excess liquidity and currency devaluation measures as
economic stimuli have grown more critical. Given concerns about the dangerousness of such policies,
fundamentalists doubt if these policies would be sustainable. Among economies other than theUnited States, Europe is still plagued with serious fears growing over budget crisis and sovereign
debt problems. The Chinese economy, as the driver of the world economy, has grown more uncertain
due to the deceleration of growth, rising inflation, real estate price spikes and other problems. From
next year, the world economy, though benefitting from economy-boosting effects of monetary easing
measures over a short term, may face more and more worries.

While crude oil prices remain in a high range, downside risks are increasing. Crude oilmarket developments are now ambivalent. The world economy, international oil markets and crude
oil prices are likely to grow more turbulent next year.
Contact: report@tky.ieej.or.jp

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