IEEJ：March 2020○ｃIEEJ 2020
Special Bulletin
A Japanese Perspective on the International Energy Landscape (470)

March 6, 2020Brent fell below $50/bbl for 1st Time in 32 Months on New Coronavirus Expansion
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Crude oil prices have been plunging due to the expanding new coronavirus pandemic. On
March 5, the key Brent futures contract on the London market declined by $1.14 per barrel from theprevious day to $49.99/bbl, slipping below $50/bbl for the first time in 32 months, since July 24,2017. On the same day, the key West Texas Intermediate futures contract also dropped by $0.88/bbl
to $45.90/bbl.
Crude oil prices opened 2020 higher in response to the growing risk of a U.S.-Iran military
clash. On January 6 when concern about the risk peaked, Brent hit the year’s high of $68.91/bbl. As
the two countries were later expected to avoid any all-out military clash, however, oil prices restoredstability and entered a downtrend due to an easing supply-demand balance in the international oilmarket.
The International Energy Agency, the Organization of the Petroleum Exporting Countries
and many experts have forecast that non-OPEC oil production growth would exceed global oil
demand growth in 2020. In its latest monthly oil market report, the IEA forecast that global oil
demand in 2020 would increase by 0.83 million barrels per day while non-OPEC oil production
expands by 2.05 million bpd due primarily to a U.S. production increase. Abundant (too abundant)
oil supply is exerting downward pressure on oil prices. In a bid to support oil prices, the OPEC-plus
group expanded their joint oil production cuts to 1.7 million bpd from January 2020. In suchsupply-demand environment, crude oil prices restored stability in the wake of the rise of geopoliticalrisks, with Brent falling below $60/bbl in late January.
Adding fuel to the downtrend are the expanding new coronavirus pandemic andsubsequently growing global economic slowdown risks. The new coronavirus pandemic broke out in
China’s Wuhan late last year and expanded mainly in the city before spreading throughout the world.
The World Health Organization said the new coronavirus as of March 5 had infected 95,333 people(including 80,565 in China) and killed 3,282 people (including 3,015 in China). China and othercountries have come up with various policies and measures to prevent the pandemic from expanding.
At present, however, the expansion has remained unchecked.
In such circumstances, the Chinese economy was the first to be disrupted. The expanding
pandemic in China known as the world’s factory has led to a general economic slowdown andstagnant private consumption in China, shaking the global economy. As Chinese economic growthand subsequent demand expansion supported the international oil market and other commodity
markets in the past several years, China’s economic slowdown and demand deceleration are exerting
great impacts on international markets. Market prices rapidly declined, as symbolized by Brent’s fall
below $55/bbl in early February. As the OPEC-plus group’s possible enhancement of joint
production cuts and an oil production decline in Libya plagued with its domestic destabilization werereported, however, oil prices’ fall seemed to stop. Since the last week of February, however, oil1

IEEJ：March 2020○
ｃIEEJ 2020
prices have taken a plunge.
This is because the new coronavirus pandemic is feared to expand further to exert grave
impacts on not only China but also the entire global economy. In a manner to symbolize the fear, theDow Jones industrial average on the New York stock market continued plunging for seven trading
days from February 20 after hitting a record high of 29,551 on February 12. It recorded the sharpest
ever single-day decline of 1,191 points on February 27. On February 28, the index closed at 25,409,
down 4,142 points or 14% from the record high. Even in the U.S. economy that has continued robust
growth, concern has grown over deterioration to be caused by the new coronavirus pandemic. TheFederal Reserve had no choice but to announce emergency interest rate cuts on March 3. Even after
the rate cuts, however, the U.S. stock market remained unstable, repeating sharp rises and declines.
On March 5, the Dow Jones average posted a steep fall of 970 points, leading Brent to slip below$50/bbl.
Forecast global economic growth rates have begun to be revised down. On March 2, theOrganization for Economic Cooperation and Development released its latest outlook lowering theforecast global growth by 0.5 percentage points to 2.4% for 2020 due to the pandemic. The outlook
cut China’s forecast growth by 0.8 points to 4.9%, warning that Asia linked closely to the Chinese
economy would be greatly affected. Although the U.S. growth projection was lowered by only 0.1
points, the OECD outlook pointed out that the forecast global growth could be lowered further
depending on future developments.
In this way, strong downward pressure on oil prices has emerged as the impact of theexpanding pandemic has led to serious global economic slowdown risks. As a result, the OPEC-plus
group, which consists of OPEC and some non-OPEC oil-producing countries such as Russia
participating in the joint production cuts, has come under market pressure to enhance the production
cuts.
On March 5, OPEC at its 178th meeting in Vienna considered the need for enhancing
production cuts in view of the current supply-demand environment for the international oil market
and the expanding new coronavirus pandemic’s impacts on the global economy. Based on its latest
forecast that global oil demand growth in 2020 would be halved to 0.48 million barrels per day from
1.1 million bpd as projected last December, OPEC agreed to “recommend” OPEC-plus participants(1) to maintain earlier agreed production cuts totaling 1.7 million bpd until the end of 2020 and (2)to implement additional cuts totaling 1.5 million bpd (1 million bpd for OPEC and 0.5 million bpd
for non-OPEC oil-producing countries) until the end of 2020.
As shown by a press release after the OPEC meeting, the agreement featured the“recommendation” of enhanced production cuts including the additional cuts totaling 1.5 million bpd.
The agreement was strongly affected by Russia’s attitude of refusing to support the enhancement.
Russia, which has been increasing oil production while nominally participating in the joint
production cuts, is concerned that the enhanced production cuts to support oil prices would
eventually benefit U.S. shale oil and lead Russia to see its market share shrinking. Although weak oil
prices are unfavorable for its economy, Russia has remained negative about the additional production
cuts under various strategic considerations. The OPEC-plus group has thus failed to agree on allparticipants’ commitment to the additional production cuts. Seemingly, however, the group has
avoided any decisive breakup by refraining from announcing an agreement that clearly excludes
Russia. The press release may be interpreted as indicating that OPEC including Saudi Arabia would
take leadership in cutting production while retaining the spirit of the joint production cuts.
2

IEEJ：March 2020○ｃIEEJ 2020

We must pay attention to future market developments indicating how the market wouldinterpret or judge the OPEC-group meeting results. The status of the new coronavirus pandemic andits impacts on the global economy is changing. Depending on the pandemic’s future expansion andimpacts, the oil market will be greatly shaken.

Contact: report@tky.ieej.or.jp
The back issues are available at the following URL
http://eneken.ieej.or.jp/en/special_bulletin.html

3