IEEJ: April 2011

Special Bulletin
A Japanese Perspective on the International Energy Landscape (38)April 8, 2011

North Sea Brent Tops $120/barrel
Ken Koyama, PhD
Director
Strategy and Industry Research Unit
The Institute of Energy Economics, JapanOn April 4, the North Sea Brent crude oil futures (front-month contract) price closed at$121.06/barrel, finishing above $120/barrel for the first time in 33 months, since August 2008. The
average price for the first quarter of this year came to $107.2/barrel, up $29.3 or 38% from a yearearlier.
It may be needless to say that principal causes of the Brent price spike are the intensifying
tension and turmoil in Libya and relevant oil supply interruptions. Behind the price spike, however,the Libyan situation is closely intertwined with growing geopolitical risks related to supply
interruptions, impacts of financial factors, and international oil supply and demand.
As reported by A Japanese Perspective on the International Energy Landscape (36),European and U.S. attacks on military facilities of Colonel Muammar Gaddafi's dictatorial regime
started on March 19, triggering a three-way struggle between the Gaddafi regime, dissident forcesand Western countries. But the struggle has come to a deadlock, leaving the future course of theLibyan situation in the balance. Government and dissident forces have activated “diplomacy” with
Europe and the United States, and as well with neighboring countries, complicating the situation.
Amid the intensifying military clash, Libya's oil production has declined substantially. Libyan crude
oil's supply to the international oil market has effectively been interrupted. On April 6, however,reports stated that dissident forces exported crude oil aboard tankers to secure their own financial
resources, anticipating the struggle to be prolonged. But there were other reports that the Gaddafi
side attacked oilfield facilities to block dissidents' oil exports and that they went on an offensive
against dissidents in Misurata, the third largest city in Libya. Information has been snarled.
In addition, tensions have remained high in the Middle East. On April 3, the Gulf
Cooperation Council members including Saudi Arabia held an emergency meeting of their foreign
ministers and adopted a statement criticizing Iran for stirring up Shiites in Bahrain to help destabilize
the Bahraini situation where antigovernment movements have intensified. Iran reacted strongly tothe statement, leading tensions in the Middle East to intensify over the Bahraini situation. On April 6,U.S. Defense Secretary Robert Gates indicated Iran's involvement in the destabilization of Bahrain
and criticized Iran after talks with Saudi Arabian King Abdullah during his Saudi visit. Tensions

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IEEJ: April 2011

have thus continued over Bahrain and Iran. Saudi Arabia and other Persian Gulf countries are also
considering and coordinating measures to make a breakthrough in the Yemeni situation whereantigovernment movements are intensifying. But no path to the stabilization has been seen,contributing to increasing turmoil in the Middle East.
In response to these developments, “money” might have continued to flow into the Brent
crude oil futures market. Libyan crude oil supply interruptions have affected the oil supply/demandsituation in the European market more seriously than in other markets, while the Brent’s presence
has increased in comparison with the West Texas Intermediate that reflects a unique supply anddemand environment for a region in the United States due to the so-called Cushing inventory
problem. As a result, Brent futures transactions have expanded substantially. In the first quarter ofthis year, Brent futures trading volume increased 34% from a year earlier to 32.76 million contracts.
Open interest for Brent futures trading at the beginning of April stood at 927,000 contracts, up 24%
from a year earlier. While the WTI futures market is brisk, the Brent market’s robustness has
attracted attention. While “money” flowed into these markets, crude oil futures prices continued torise.
At the same time, attention-attracting developments may have been progressing withrespect to oil supply and demand. While the international oil market now features sufficient supply
with no overall shortage0 seen, careful observers may find the global supply-demand relationshipmoving for tightening gradually. Among supply and demand buffers in the market, OPEC’s surplus
oil production capacity has been falling. IEA data put OPEC’s surplus capacity at 5.06 million
barrels per day for February 2011. This level is not necessarily low. But there are some importantproblems. First, the surplus OPEC capacity continued to decline for three months from 6.14 million
bpd in November 2010. Second, the February level of 5.06 million bpd included the Libyan portionof 420,000 bpd. The effective capacity excluding the Libyan portion came to 4.64 million bpd. Third,the surplus OPEC capacity might have decreased further on an expansion in Saudi output fromMarch. Fourth, Saudi Arabia accounted for 3.2 million bpd or about 70% of the effective surplus at
4.64 million bpd. Particularly, the last problem of the surplus OPEC capacity’s concentration in
Saudi Arabia could be combined with speculations about a spillover of North African and Middle
Eastern destabilization to Saudi Arabia to affect the market. The OECD countries’ private-sector
crude oil and petroleum products inventories in January 2011 were close to 2004-2010 averages andnot necessarily low. But both crude oil and petroleum products inventories have been falling since
the second half of 2010. These developments indicate that the oil supply-demand relationship isgoing in the direction of tightening, although the market has no particular supply and demand
problem for the immediate future. Amid these supply and demand developments, the growing
tensions in the Libyan and Middle Eastern situations have been stimulating market speculations. Inresponse, the money factor might have been working.
In addition to these opaque factors, uncertain factors including unknown impacts of thegreat Eastern Japan earthquake and tsunami on the Japanese economy and the world economy and2

IEEJ: April 2011

on Japan’s oil demand, as well as a potential resurgence of a sovereign debt crisis in Europe, areclouding the future course of the international oil market. The Japanese disaster is expected to exert
two conflicting impacts on oil demand – an oil demand slowdown accompanying Japan’s economicdeterioration and an increase in power generation fuel demand amid an expansion in thermal powergeneration, complicating future prospects further. How these factors will work is difficult to predict,and so is which factors market participants would pay attention to. The future course of crude oilprices has been growing even more uncertain.
Contact: report@tky.ieej.or.jp

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