IEEJ: November 2011 All Rights Reserved
Special Bulletin

A Japanese Perspective on the International Energy Landscape (65)

November 11, 2011

Crude Oil Prices Shaken by European Crisis, Fundamentals, Iran Problem
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan

Crude oil prices in international oil markets have grown even more volatile. Thebenchmark West Texas Intermediate crude futures price rose back above $90/barrel in late Octoberafter hitting a low just above $75/barrel on October 4. The price continued an upward trend while
seesawing in early November. On November 10, it rose to $97.78/barrel, the highest level in threemonths, since late July. The price is likely to rise above $100/barrel. The Brent crude futures price,another benchmark, has followed a similar trend, moving above $110/barrel since early November.
At a time when various fears exist about the world economy, crude oil price hikes are expected toattract attention as a new problem.

What has been behind such price trend? We have frequently seen various factors mixed
complexly behind crude oil price trends. Here, I would like to take up three factors.

The first factor is the world economy and financial market trends. Recently, the trends
have remained as the most influential crude oil price driver. Most recently, European economic andsovereign debt crisis developments have shaken financial and crude oil markets. Crude oil prices’
downward trend resulted from the deepening debt crisis and default fears in Greece, as noted in A
Japanese Perspective on the International Energy Landscape (62): G-20 Communiqué andInternational Energy Market. Encouraged by market-stabilizing efforts including those specified in
the Group of 20 communiqué, crude oil prices turned up. Another key development was anagreement at an October 26 European Union summit on the Greece rescue and banking systemstabilization measures including a cut widened to 50% in banks’ Greek debt holdings, the expansionof the European Financial Stability Facility to about 2 trillion Euros and the recapitalization of banks
in the euro zone. The agreement contained market fears, supporting stock and crude oil prices.

Soon after the EU summit agreement, however, many experts warned that the pact fell
short of resolving problems fundamentally and postponed the resolution in some sense. On October
31, in fact, Greek Prime Minister George Papandreou suddenly offered a referendum on Greece’s1

IEEJ: November 2011 All Rights Reserved
acceptance of the comprehensive EU Greece rescue plan based on the precondition of Greek budget
austerity, throwing markets into confusion. Later, Papandreou withdrew the referendum offer andresigned as prime minister. The destabilization of Greece’s domestic situation affected European andglobal financial markets. In addition, credit fears spilled over to Italy. The benchmark Italian
government securities yield shot up to a dangerous zone above 7% on November 9. Then, ItalianPrime Minister Silvio Berlusconi announced his resignation, confusing the Italian situation. Markets
have grown vigilant to a possible spillover of the debt crisis to other European countries. No
optimism can be warranted on the European debt crisis. Under such circumstances, global stock
markets have fluctuated wildly. Crude oil prices have followed suit. Since early November, the Dow
Jones industrial average on the New York Stock Exchange has fluctuated around a relatively higher
level of 12,000. In response, crude oil prices have soared.

In tandem with the world economy and financial market trends, oil supply and demandconditions have recently been influencing crude oil prices, according to a growing number ofanalysts. The International Energy Agency's monthly Oil Market Report released on November 10
pointed to a tightening oil supply-demand relationship as indicated by a downward trend ofinventories in the member countries of the Organization for Economic Cooperation andDevelopment. It also noted that the relationship could tighten further as the “call on OPEC
(Organization of Petroleum Exporting Countries) crude oil” (global oil demand's gap with
non-OPEC output), a harbinger of the future oil supply-demand balance, is expected to exceed actual
OPEC output in 2012 as well as in 2011. Oil supply and demand fundamentals have thus been
behind the upward trend of crude oil prices since the second half of October, according to the report.
In this respect, we may have to closely watch future supply and demand conditions including globalwinter oil demand and oil output in major oil exporting countries. As a matter of course, the future
course of the world economy is the largest driver of oil demand. Therefore, the world economy andfinancial market trends cited as the first factor may turn out to be even more important.

The third factor is geopolitical risks that have recently been attracting attention.
Specifically, they represent the Iranian problem. On November 8, the International Atomic Energy
Agency released a report on the Iranian nuclear problem, citing specific information to point out thatIran has implemented operations to develop nuclear weapons. While Iran has denied and fiercely
protested the report, the international community including the United States has indicated an eventougher attitude against Iran. As speculations grow about tougher anti-Iran sanctions and military
operations, tensions have grown among the region. The emergence of geopolitical risks might haveprompted crude oil prices to gain momentum for their further hike. For the immediate future,tensions over the Iranian situation may have to be positioned as a key factor affecting marketsentiment.
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From late this year to early next year, various turbulence factors may arise in internationaloil markets while occasionally exerting great influences on the markets. The international energy
situation is likely to see stormy developments successively.

Contact: report@tky.ieej.or.jp
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http://eneken.ieej.or.jp/en/whatsnew/JPOIEL.html

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