IEEJ：October 2019○ｃIEEJ 2019
Special Bulletin
A Japanese Perspective on the International Energy Landscape (448)

October 3, 20192019 January-September Average Brent Price down $8.35/bbl to $64.37/bbl
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanThe average front-month futures contract price for the benchmark Brent crude oil came to$64.37 per barrel in the first nine months of this year on a daily closing price basis, down $8.35/bbl or
11.5% from $72.72/bbl in the same period of 2018 and up $11.86/bbl or 22.6% from $52.51/bbl in thesame period of 2017. The average in the January-September 2019 period thus stood at around themiddle between the averages for the same periods of 2017 and 2018. In the January-September 2019
period, the key Brent futures price peaked at $74.57/bbl on April 24 and bottomed at $54.91/bbl onJanuary 2. In a remarkable development on September 16, the price shot up by $8.8/bbl from theprevious trading day to $69.02/bbl after Saudi Arabia suffered a crude oil production loss of 5.7 million
barrels per day on drone attacks on the oil facilities in the Kingdom.
The average key futures price for the other benchmark crude oil of West Texas Intermediatein the first nine months of this year stood at $57.10/bbl, down $9.69/bbl year on year, peaking at$66.30/bbl on April 23 and bottoming at $46.54/bbl on January 2.
In response to a decision by the Organization of the Petroleum Exporting Countries andsome non-OPEC oil-producing countries to jointly reduce production in December 2018, crude oilprices rose in the beginning of 2019 after a plunge late last year. As the United States came up with afull oil embargo on Iran, they increased in anticipation of an Iranian oil export fall and a tighter supplydemand balance, peaking in late April. In May, however, the United States toughened its stance against
China again through tariff hikes, leading crude oil prices to enter a downtrend on growing global
economic risks through the escalation of the U.S.-China trade war.
Next, geopolitical risks in the Middle East attracted attention from oil market participants.
Tensions over Iran grew on attacks on tankers and the shootdown of a U.S. military drone near theStrait of Hormuz in June. Middle Eastern geopolitical risks remained high later on Iran’s seizure of aBritish tanker and its resumption and enhancement of uranium enrichment. Potential accidental clashes
became a matter of concern. Then came the abovementioned drone attacks on the Abqaiq and Khurais
oil facilities known as one of the hearts of Saudi Arabia’s oil production, bringing about the oilproduction loss of 5.7 million bpd and rattling the world. The shocking incident triggered an oil pricespike. As Saudi Arabia recovered the destroyed facilities more smoothly than expected and restored
its oil production level before the attacks by late September in line with its published schedule,
however, crude oil prices regained stability. The Brent futures price closed at $60.78/bbl on September
30, falling back to the level before the attacks.
So far this year, crude oil prices have been susceptible to two major factors -- the U.S.-China
trade war and relevant global economic risks, and the destabilization of the Middle East. The twofactors move the market in different directions. When the two factors balanced with each other, crude
oil prices narrowly fluctuated. When their balance collapsed, however, they moved remarkably. This1IEEJ：October 2019○ｃIEEJ 2019means that crude oil prices declined when market participants focused their attention on the U.S.China trade war and rose when the destabilization of the Middle East attracted their attention. As amatter of course, this is an excessively simplified relationship. Other factors attracting attention frommarket players include U.S. shale oil productions changes, oil supply drops or disruptions in othermajor oil-producing countries like Venezuela, and OPEC-plus policy trends. Undoubtedly, however,
the two abovementioned factors have exerted greater influence on the market.
How the two major factors will develop would remain the most important point for
anticipating the international oil market and crude oil prices through the end of this year or 2020. I
would like to check oil market supply and demand conditions as the base for considering the influenceof the two major factors.
Apart from destabilizing factors such as the two major ones, the international oil market canbe expected to see supply growth surpassing demand growth depending on non-OPEC oil production
alone. According to the latest monthly oil market report by the International Energy Agency, global
oil demand in 2020 is predicted to increase by 1.3 million bpd from the previous year. As the world
economy grows at a moderate pace of above 3%, oil demand is expected to increase mainly in Asianemerging countries. At the same time, however, non-OPEC oil production including U.S. output in2020 is predicted to expand by 2.3 million bpd from the previous year. Non-OPEC oil production
growth is thus expected to exceed global demand growth. Therefore, it is important for the OPEC-plus
group to continue to adjust supply. Particularly, Saudi Arabia will play a central role in adjusting supply.
Saudi Arabia’s significance as a suppler adjuster in the international oil market is distinct.
The problem is how the two major factors would be discounted into the market based onsuch supply and demand conditions. The fate of the U.S.-China trade war remains unpredictable,
leading global economic risks to linger. If the situation worsens further with a global economic
slowdown realized, downside pressure would grow on crude oil prices. If the U.S.-China trade war
follows the worst scenario, global oil demand growth would be 0.67 million bpd (including 0.21
million bpd in China) less than in the reference scenario due to global economic growth deceleration,according to an analysis by the Institute of Energy Economics, Japan. If global oil demand growth ishalved from the IEA-projected level, crude oil prices would fall sharply without a substantial
additional production cut by the OPEC-plus group. Regarding global economic risks, the fate of thechaotic Brexit problem may also attract attention. From late September to early October, the Brent
price declined as U.S. stock prices fell on growing concern about the future course of the U.S. economy.
On October 2, Brent slipped below $60/bbl to $57.69/bbl, reflecting global economic risks.
The destabilization of the Middle East is also an unignorable risk. The attacks on Saudi
Arabia and subsequent oil supply disruption in September might have ushered in a new stage.
Although Saudi Arabia rapidly restored oil production to overcome the disruption, the temporary
production loss in Saudi Arabia as the heart of global oil supply shocked oil market players. It is very
important how this incident would raise tensions and uncertainties over Iran to bring about relevant
geopolitical risks. Given that no one can substitute oil supply from the Middle East or Saudi Arabia
over a short term, we must keep various risks in mind and be prepared for “war even in peacetime”.
In an analysis published in July, our institute gave a reference outlook indicating that Brent
would remain in the lower half of a $60-70/bbl range in 2020. In a higher price case including thedestabilization of the Middle East, the price would be $15/bbl higher. In a lower price case including
global economic deceleration, the price would be $10/bbl less. We will have to closely watch potential
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IEEJ：October 2019○ｃIEEJ 2019
developments and turbulences regarding the two major factors.
Contact: report@tky.ieej.or.jp
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