IEEJ：May 2020 ©IEEJ 2020
Special Bulletin
A Japanese Perspective on the International Energy Landscape (479)

May 8, 2020

WTI Back above $20/bbl on Plans to Reopen Business and Ease Restrictions
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanThe world is still exposed to the rampant COVID-19 pandemic, with infections and deaths
continuing to increase. The pandemic remains serious, with no optimism warranted about its future
course. Even in such situation, major Western and Asian countries plagued with expanding COVID19 infections are planning to reopen business and ease outing and movement restrictions underlockdowns, concluding that COVID-19 infections might have peaked while falling short of ending.
In Italy that became the first European country to experience a new coronavirus infection
explosion and suffer heavy damage, for example, nationwide outing restrictions from March 10 werepartially eased on May 4, with some business operations reopened. On May 6, Germany announced aplan to phase out lockdowns, concluding that the infection expansion has decelerated. All shops wereallowed to reopen. The Bundesliga professional soccer league decided to resume games behind closed
doors. France offered to phase out lockdowns other than those in Paris from March 11. In the UnitedStates plagued with the most COVID-19 infections and deaths and the greatest damage in the world,President Donald Trump indicated his ambition to reopen business, asserting that citizens should return
to business as usual. By May 6, plans to reopen business were seen in more than 30 states. In New
York State that has been hardest hit by the pandemic, a four-stage plan by industry category to phaseout restrictions was announced. Though deciding to extend its emergency declaration until May 31,
Japan indicated that some restrictions would be eased in regions with fewer infections and that thedeclaration could be lifted in some regions ahead of schedule depending on experts’ decisions. In Asia,Vietnam, Malaysia, Thailand and others are planning to lift COVID-19 restrictions.
Behind these plans, there has been a conclusion that COVID-19 infections, though fallingshort of ending, have peaked with new infections declining. This may mean that the world hastransitioned to a new phase from the first phase where the infection expansion should be prevented
even at the cost of business or people’s livelihoods. Another factor behind these plans may be a senseof crisis that a business freeze or lockdown may no longer be economically sustainable. After
lockdowns, countries have no choice but to give priority to economic survival as well as to infection
expansion prevention. In each country, businesspersons and consumers have increasingly called forreopening business while balancing business with infection expansion prevention.
These plans have exerted some influence on crude oil prices. The front-month futurescontract on West Texas Intermediate crude oil unusually went negative under special conditions on
April 20, rebounded to $10.01 per barrel on the next day and remained above $10/bbl. From $12.34/bbl
on April 24, however, it crept up and reached $20.39 on May 4, rising back above $20/bbl at last. The
key WTI futures price later remained roughly in a 23-24/bbl range. This range is still low enough tocause a severe business environment for oil-producing economies and the international oil and gas
industry. Behind the rally amid concerns about the price’s slip below $10/bbl might have been theabovementioned plans to reopen business and relax or lift outing and movement restrictions.
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Another potential factor may be record joint oil production cuts exceeding 10 million barrels
per day by the Organization of the Petroleum Exporting Countries and non-OPEC oil-producing
countries, which might have exerted some impact on the market. If without the joint production cuts,
the international oil market might have plunged into a devastating crisis. In this sense, market players
can never ignore the massive production cuts that can lead the international oil market to go in the
direction of rebalancing. Nevertheless, the plans to reopen business and lift outing and movement
restrictions might have exerted a greater impact on the market. However, the plans to reopen businessand lift restrictions have just begun to be made, falling short of being implemented in a full-blown
manner. The plans have thus exerted some influence only on hopes of market participants.
The impact of such hopes is also great. The biggest factor behind the crude oil price crash
induced by unprecedented oil oversupply has been an oil demand plunge under the pandemic.
Particularly, the oil demand loss on a dramatic decline in demand for fuel for transportation under
lockdowns has exerted a huge impact. The pandemic is estimated to lead global oil demand to decline
by 20 million bpd or more. Most of the demand loss is attributable to lockdowns (and a subsequentdecline in business operations) (see the previous issue of A Japanese Perspective on the International
Energy Landscape). The problem is that the present and future scale, strength and duration of
lockdowns having a big impact are very uncertain. Depending on the scale, strength and duration, theoil demand decline would change dramatically.
This is the reason the plans made in late April and early May to reopen business and ease orlift outing and movement restrictions became a key factor triggering the upturn in crude oil prices. The
plans have induced hopes that oil demand would rebound. In the future, it would be important to pay
attention to the impact of such hopes. However, the impact the hopes would continue to have isuncertain.
First, the plans to reopen business and lift restrictions have just begun to be made, as notedabove. The oil price rebound reflects hopes placed on the impact of actual business reopening and thereal lifting of restrictions. As far as it is difficult to know how much oil demand has plunged due tolockdowns, we have difficulties in estimating how much oil demand would rise back on the business
reopening and the lifting of the restrictions. In this sense, most market participants rely heavily on
uncertain hopes or forecasts.
Second, many people call for being cautious about reopening business or lifting restrictions,leaving the future path uncertain. Each country is exploring business reopening while acknowledging
that it should be balanced with prevention of COVID-19 infection expansion. If there is a sign that
coronavirus infections are expanding again, plans to reopen business and lift restrictions would haveto be decelerated. If a second wave of the pandemic comes, severe lockdowns would have to bereintroduced. If all things go well to allow business reopening and restriction lifting plans to beimplemented steadily, however, oil demand would be expected to rebound steadily. Future
developments depend on the future of the pandemic. No optimism can be warranted.
Third, we cannot ignore the impact of continuing oversupply and inventory accumulation
while the plans to reopen business and lift restrictions have so far had a decisive impact on the market.
If oil inventories grow further close to a global storage capacity limit, it may exert a great impact onmarket sentiment again.
In the future, we should closely watch pandemic developments and subsequent fluctuations
in crude oil prices.
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