IEEJ：August 2020

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Special Bulletin
A Japanese Perspective on the International Energy Landscape (493)

August 13, 2020

Will Oil Prices Move away from the current $40-45/bbl Range since July?
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Crude oil prices have strangely been stable since July, seesawing within a narrow range.
The front-month futures contract’s daily closing price for West Texas Intermediate rose slightly from$39.82 per barrel on July 1 to $42.67/bbl on August 12 but has remained within a narrow range of$40-42/bbl for the past 1.5 months. The daily closing price deviated from the range on only five
trading days in the period. The price of Brent, the other benchmark crude, also increased slightly
from $42.03/bbl on July 1 to $45.43/bbl on August 12, staying in a $42-45/bbl range. It rose beyond$45/bbl on only three trading days in the period. Crude oil prices have thus remained within a boxedrange.
The recent stability starkly contrasts with wild fluctuations from early this year. Crude oilprices shot up on growing U.S.-Iran tensions at the beginning of this year and crashed due to oildemand evaporation under the novel coronavirus pandemic from March and a price war between
Saudi Arabia and Russia. In April, the WTI price turned negative for the first time ever. The
Organization of the Petroleum Exporting Countries and Russia with some other non-OPEC
oil-producing countries revived their joint production cuts in May to counter the crash. The record
OPEC-plus joint production cuts were coupled with an oil demand rebound amid the reopening ofbusinesses and the lifting or easing of lockdowns under the pandemic to allow oil prices to risemoderately. The first half of this year thus saw an unprecedentedly dramatic fluctuation in thehistory of crude oil prices. As noted in the outset of this report, however, crude oil prices transitioned
from the wild fluctuations over six months to stability in July. The stability indicates a lull after anoil price recovery from May.
Why have crude oil prices been so stable? There may be various factors working
compositely behind the present stability. The most important point is that the market lacks any major
price-moving factor or that various factors are balanced. On the demand side, demand evaporationthat caused the crash earlier this year has already gone, with demand recovering. Lockdowns hadbrought about demand evaporation but have been globally lifted or eased to pave the way forbusiness reopening that has led to an oil demand recovery. The dramatic change on the demand side
has supported oil price hikes. While the momentum for an economic recovery still exists globally, its
impact on oil prices might have relatively weakened from that of an escape from the worst phase.
Furthermore, oil market participants are conscious that any recovery from the coronavirus
disaster would take much time or that a second or third wave of coronavirus infections could come.
The worst period for the world economy and global oil demand was the second quarter of this year,
which was widely expected to be followed by a V-shaped recovery. In fact, the world economy andoil demand are recovering from the worst period. In the face of realities regarding the impact of thepandemic, however, market participants are concerned that the recovery would be a U-shaped orslow one or an L-shaped one including a prolonged recession. Some analysts have recently pointed
to a K-shaped recovery featuring various regional recovery patterns, noting that some regions or1

IEEJ：August 2020

©IEEJ 2020

fields are recovering, with others failing to do so.
As such perceptions about the world economy and oil demand have become widespreadamong market participants, oil demand recovery (and hopes on demand recovery) has seemingly lostits power to support oil prices. From this viewpoint, oil prices are expected to show remarkablechanges depending on future developments regarding the coronavirus disaster. If hopes on an end tothe coronavirus disaster grow in a manner to make the world economy’s steady recovery path clearer,
oil prices could break away from the present lull and launch the next uptrend. If the world economy
is likely to remain in a trough due to a second or third wave of coronavirus infections, however, oilprices could come under downward pressure again.
Complicating the future course of oil prices are responses from the supply side. TheOPEC-plus group has made utmost efforts to implement production cuts to support oil prices after
their crash. However, group members in principle compete each other for greater market shares andhave their respective national interests, making it difficult for them to maintain their solidarity for alonger time period. They have enhanced their solidarity in the emergency situation including the oil
price crash but could emphasize their differences in stances and strategies if oil prices rise back tosome extent.
Another attention-attracting factor is U.S. shale oil production that has stayed outside theOPEC-plus group and exerted the greatest influence on the global oil supply-demand balance. Theoil price crash forced some parts of its production to be suspended at high-cost shale oil fields,resulting in a steep year-on-year fall in U.S. oil production. In response to the oil price recovery,
however, the U.S. oil production drop has decelerated since early June. Signs of a production
rebound can be seen. U.S. shale oil production sensitive to oil price changes has suppressed oil pricehikes, though depending on oil demand recovery. Therefore, the OPEC-plus group must delicately
adjust their production in consideration of the supply-demand balance and formulate a sensitive
strategy to support or stabilize oil prices.
Given the abovementioned environment surrounding the international oil market since July,it might have become difficult for oil supply and demand fundamentals to exert visible influence on
oil prices. This means that market players have found it not easy to proactively take short or longpositions depending on demand or supply factors. They have taken a wait-and-see attitude inpreparation for the next major change in the international oil market.
In such situation, oil supply and demand factors have had less influence on oil prices,leading oil prices to be moved by their relations with or the influence of financial markets. Crude oil
futures as risk assets have been linked to stock prices. The dollar weakened toward late July due toconcerns over the future U.S. economy, contributing to a slow and gradual rise in crude oil prices,
according to market participants. While supply and demand factors’ influence on oil prices has beenlimited, financial markets’ influence on the prices has become relatively larger.
Nevertheless, we must take note of the possibility of oil prices changing sharply from latethis year to next year. The most important point in this regard would be future developments
regarding the coronavirus disaster and the global economic trend. How the supply side would or
could respond to demand side changes would also be important. I would like to closely watch thefuture international market and price trends including geopolitical risks and other unpredictablefactors.
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