IEEJ: January 2011

Special Bulletin
October 7, 2010
A Japanese Perspective on the International Energy Landscape (13)Monetary Easing Competition and Crude Oil Prices
Ken Koyama, PhD
Director
Strategy and Industry Research Unit
Institute of Energy Economics, JapanOn October 6, the West Texas Intermediate crude oil futures price on the New York
Mercantile Exchange rose to $83.23/barrel, the highest level since early May. The benchmark crude
oil futures price slipped below $80/barrel on August 11 and remained below the level for nearly twomonths before turning up recently. It rose above the $80/barrel level on October 1. What factors havebeen behind the recent rapid oil price hike?
Main factors include global macroeconomic and financial situation changes. It may be noexaggeration to say that supply/demand fundamentals (particularly, its current conditions), which areusually primary factors for pricing crude oil, have made little contribution to the recent rapid pricehike. Market conditions indicate that oil demand growth has globally been met, with supply
remaining abundant. As a result, oil inventories have maintained record levels in the United States
and the entire Organization for Economic Cooperation and Development. Crude oil prices havefrequently soared even amid an easy supply/demand balance since 2009. But the latest hike might
have uniquely stemmed from liquidity-driven markets caused by Japanese, U.S. and other monetaryeasing measures.
The most symbolic among these measures might have been those that the Bank of Japandecided to take on October 5. The central bank made and announced the decision to (1) lower its
policy interest rate from 0.1% to a 0.0-0.1% range (zero interest rate policy), (2) to maintain the zerointerest rate policy until an inflation rate of 1% comes into sight, and (3) to purchase 5 trillion yen insuch assets as government securities, corporate bonds and exchange-traded funds. These measures
represented a far greater quantitative monetary relaxation than expected by market players. Since thetermination of its quantitative easing policy in 2006, the BOJ might have believed it would not haveto resort back to the zero interest rate policy. Amid the yen's prolonged appreciation, growing
deflation fears and rising concerns about an economic downturn, the central bank came up with themonetary easing measures in a manner to cope with an emergency. In a sense, the monetary policy
authorities were required to move in step with the government that was considering additional

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IEEJ: January 2011

economic stimulus measures.
We must pay attention to the fact that the BOJ decision came in the context of a global
monetary or quantitative easing competition. Particularly in the United States where quantitativeeasing measures have already been implemented, the Federal Reserve’s Federal Open MarketCommittee is well expected to decide on additional quantitative easing measures at its next meetingset for November 2-3. Under market expectations including the possible additional U.S. measures,the BOJ’s monetary easing decision has had a smaller yen-lowering effect than earlier expected. In
the future, therefore, the BOJ could implement more additional monetary easing measures while
watching developments in the world including the United States. In fact, the BOJ decision covering
5 trillion yen in purchases of a wide range of assets can be interpreted as paving the way for further
quantitative easing.
As Japan and other countries in the world race to take monetary or quantitative easing
measure to stimulate national economies, huge funds or liquidity are provided to the market. The
huge liquidity provisions, though expected to play a key role in supporting the economy, candramatically change money flows into various financial assets and commodities through a fund flow
into riskier assets and growing hedging needs amid currency depreciation fears. We can interpret therecent market developments as indicating that such dramatic changes are now taking place to boost
stock and commodity prices. In a typical development, gold has shot up to an all-time high beyond$1,300 per Trojan ounce.
The benchmark crude oil futures price’s recent hike to a five-month high should beunderstood as part of global market developments. Of course, there are various uncertain factors in
the global macroeconomic and financial situations, meaning that future developments are difficult toanticipate. Liquidity-driven markets could lead to asset bubbles. In this sense, market trends anddevelopments may grow more uncertain. For the immediate future, however, ample liquidityprovisions are likely to remain as a precondition for market developments as major industrial nations
continue their monetary easing race to overcome deflation. Crude oil prices may be formed undersuch situation. In this sense, the benchmark WTI futures price is expected to remain above$80/barrel for the immediate future. But whether the ceiling of the recent $68-86/barrel range could
be tested is difficult to predict. Including this possibility, the fate of the liquidity-driven markets may
attract much attention.

Contact: report@tky.ieej.or.jp

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