IEEJ：February 2019○ｃIEEJ 2019
Special Bulletin
A Japanese Perspective on the International Energy Landscape (413)

February 1, 2019Brent Crude Price Averages $60.2/bbl Remaining Stable in January 2019
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
In the first month of 2019, daily closing prices of front-month crude oil futures contracts
averaged $60.24 per barrel for Brent and $51.55 for West Texas Intermediate. In the second and laterweeks of January, particularly, Brent remained in a narrow range around $60/bbl, marking quiet,moderate fluctuations for the beginning of 2019.
In January 2018 one year ago, the average price came at $69.08/bbl for Brent and$63.66/bbl for WTI, some $10/bbl higher than in January 2019. As crude oil futures prices wererising from late 2017, Brent topped $70/bbl for the first time in more than three years in the middleof January 2018, attracting global attention. Crude oil prices thus started this year more quietly.
Compared with the 2018 annual average prices of $71.68/bbl for Brent and $64.90/bbl for WTI, theJanuary 2019 averages were over $10/bbl lower.
However, the January 2019 trend can be viewed from a different angle. In short, themonth’s trend can be characterized as a temporary lull following a downtrend. After peaking above$86/bbl last October, Brent plunged into a downtrend. As the downtrend accelerated in December,particularly, Brent sank to the year’s low of $50.47/bbl on December 24, threatening to slip below
the psychologically important barrier of $50/bbl.
Factors behind the plunge included (1) downward pressure of the loosening
supply-demand balance symbolized by growing oil inventories and (2) global economic risks
represented by uncertainties about the future course of the global economy. While oil demand wasgrowing smoothly amid global economic growth, contributors to the first factor included a
substantial increase in U.S. oil production centering on the rapid increase in shale oil output,
OPEC-plus oil producing countries’ effective switching to a production expansion in the second halfof 2018 and the U.S. Trump administration’s decision to provide a temporary waiver from the Iranoil embargo and allow Iranian oil exports to be sustained.
However, the second factor exerted greater influence on market participants’ sentiment. Ina manner to symbolize a sign of decline in the U.S. economy after a robust expansion, the U.S. stock
market sporadically crashed, triggering global stock market declines. The 30-issue Dow Jones
industrial average on the New York Stock Exchange dived from levels above 25,000 in early
December to the year’s low of 21,792 on December 24 when Brent also fell to the 2018 low. Factors
behind growing concerns about the future course of the U.S. economy include not only interest rate
hikes and a cyclical downturn after a long economic expansion but also the escalating U.S.-Chinatrade war that is expected to greatly affect the U.S. economy.

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In such situation, OPEC-plus oil producing countries led by Saudi Arabia had no choice
but to come up with a decision to cut their coordinated production by 1.2 million barrels per day
from January 2019 at their meeting on December 7. Under the continued downward pressure on
crude oil prices, the production cut to adjust the supply-demand balance was indispensable. Evenafter the OPEC-plus decision, however, oil prices failed to be stabilized immediately. As noted above,
crude oil prices even accelerated their downtrend toward late December. Therefore, it can beconcluded that concerns about global economic risks had exerted greater influence on the crude oil
futures market than the then ongoing supply-demand trend. In today’s crude oil futures market, adownward or upward momentum frequently accelerates a decline or rise, leading to an overshoot.
The December 2018 development might have represented such an overshoot.
In response to global economic risks symbolized by stock market crashes and concerns
over the future course of the U.S. economy, the United States has sought to modify monetary policy.
On January 4, the U.S. Federal Reserve Board indicated that it was ready to flexibly modify its
policy of raising interest rates in consideration of current U.S. and global economic conditions. Aftera meeting of its Federal Open Market Committee on January 30, the Fed suggested that it would bepatient when determining whether to raise interest rates, refrain from any hasty decision and suspend
its policy of raising rates, making a monetary policy change clearer. The U.S. central bank thus
demonstrated its attitude of giving priority to current economic conditions under pressure from themarket.
In response, the stock market ended a downtrend and indicated some stabilization. After
weakening in early January on the downward revision of earnings forecasts by Apple and othercompanies affected by sluggish business operations in China, the U.S. stock market restored stability.
Encouraged by the abovementioned monetary policy change, the Dow Jones average rose gradually,
exceeding 25,000 on January 30. As for the U.S.-China trade war, a major factor behind global
economic risks, U.S. President Donald Trump in a Twitter message said Washington was getting
along with China well at their bilateral structural talks launched early in January. Such relatively
positive messages have contributed to stabilizing the stock market.
The abovementioned global economic conditions were reflected in the stable crude oil
futures prices in January. After an overshoot late last year, the crude oil futures market restoredstability and entered a lull amid a wait-and-see mood.
As indicated by the phrase “a temporary lull,” however, there is no guarantee that thecurrent stability would be retained long. Even in the oil market that has restored stability, players arelooking for new clues to trading. Depending on the clues, the market could rise or fall rapidly.
Regarding macroeconomic conditions that have brought about the present stability, the fate of theU.S.-China trade war is important. The Washington-Beijing structural talks are reaching a crucial
stage in February. Depending on their achievements or results, global economic outlooks will change
greatly. While the monetary policy change supports the economy over a short term, how toharmonize the current policy with the Fed’s priority of maintaining sound economic growth over along term will become a challenge. Attention must also be paid to how the U.S. government
shutdown that lasted for more than one month would affect the U.S. economy.
In February, facts regarding the OPEC-plus oil producing countries’ 1.2 million bpd
production cut from January will become available. Market players will pay attention to whether the2

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production cut would be enough regarding the facts and the market supply-demand balance. In therun-up to the expiration of the 180-day waiver from the Iran oil embargo, the future course of Iraniancrude oil exports will attract attention in the market. At the same time, the future course of U.S. shale
oil production expansion in the current oil price environment will grow clearer. As a matter of course,
we will have to keep close watch on sudden or unexpected disruptions to oil supply. I would like to
pay much attention to whether the market would retain the current stability or move in a newdirection.

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