IEEJ: July 2013 All Right Reserved
Special Bulletin
A Japanese Perspective on the International Energy Landscape (136)

July 2, 20132013 January-June Average Price at $107.9 for Brent and $94.3 for WTI
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanThe daily closing levels of the front-month futures price averaged $107.9/barrel for thebenchmark Brent crude oil and $94.3/barrel for the other benchmark brand of West Texas
Intermediate in the January-June period this year. Compared with $113.6/barrel for the Brent and$98.1/barrel for the WTI in the same period last year, they were slightly lower. But they can still beviewed as having remained high. Global crude oil market realities lead us to see that crude oil prices
remained above $100/barrel in the first half of 2013 as well.
During the period, the Brent futures peaked at $118.9/barrel and bottomed at $97.7/barrel,
deviating upward and downward by around $10/barrel from the average. Its quarterly average fell
from $112.6/barrel in the first quarter to $103.4/barrel in the second, indicating a gradual downward
trend.
While there may be various factors behind the price trend, a key factor may be a change insentiments about the global economy. At the beginning of 2013, expectations of an economic
recovery in the United States and Japan and China’s signs of bottoming out exerted upward
pressures on crude oil prices. In the second half of the six-month period, however, expectations of an
economic recovery in major countries grew uncertain, imposing downward pressures on crude oilprices. Particularly, a major contribution to the pressures has come from various destabilizing factors
emerging in China that has driven growth in global demand for oil (and other commodities).
Another key point in the first half of this year might have been a change in the relationshipbetween stock and other financial markets and crude oil prices, which has attracted attention from oil
market participants throughout the world over the past years. The Dow Jones industrial average on
the New York Stock Exchange rose from levels just above 13,000 early this year to a record highabove 15,000 in May. Later, the average seesawed amid wild global stock market fluctuations. Thestock market upsurge since the beginning of this year has coincided with a downward trend of crude
oil prices, causing the oil price trend to deviate from the stock market trend. One factor behind thedeviation might have been that oil market participants focused their attention on market
fundamentals rather than financial factors.
The first fundamental factor is that oil supply has basically remained abundant andsufficient in the international market. Second, growing uncertainties on expectations of a global1

IEEJ: July 2013 All Right Reservedeconomic recovery and fears of China’s economic slowdown have made oil demand projections
bearish, as noted above. Third, non-OPEC oil production has been firm as unconventional oilproduction in the United States has substantially increased. Fourth, risk premiums on oil prices havedeclined as Iranian problems (including the impact of economic sanctions and possible militaryoptions) and other geopolitical factors faded away after driving up the oil market until the first halfof last year. These fundamental factors might have exerted influences on crude oil prices.
What will the international oil market be like in the future after the abovementioned trend
in the first half of this year? In anticipating the international oil market in the second half of this year,
we may have to take into account various uncertain and destabilizing factors and possible crude oil
price fluctuations to be caused by these factors. Destabilizing factors include not only those exerting
downward pressures on oil prices but also those imposing upward pressures.
As factors to drive up oil prices, we may have to pay attention to geopolitical factors. InIran, Hassan Rohani, a moderate conservative, has been elected president, indicating that the Iranian
government may seek to have dialogue with Europe and the United States over its nuclear
development problem in the immediate future. In this sense, tensions are likely to fall short ofgrowing as far as Iran is concerned. But the Middle East situation is generally destabilizing.
Geopolitical tensions regarding Syria, Egypt and Turkey have grown in the aftermath or prolongingof the Arab Spring democratic movement. Even in Iraq that has smoothly expanded oil production,
the security situation has been remarkably deteriorating due to terrorists attacks. Destabilization in
the Middle East including Iraq may affect the region’s oil supply. Deterioration in the Middle Eastsituation, though depending on the degree and scale, will remain a key factor in anticipating thefuture international oil market.
But I expect that downward pressures on crude oil prices may attract more attention in theimmediate future. No decline can be expected in U.S. light tight oil production that has continuedrobust growth. The International Energy Agency has projected that U.S. oil output will increase by
0.84 million barrels per day in 2013 after expanding by 1.03 million bpd in 2012. While global oil
demand is decelerating, the United States, known as the largest oil consumer and importer in theworld, is expected to reduce oil imports due to its own oil output expansion and consumption
reduction. This trend is likely to have a great impact on the oil supply and demand environment.
Uncertainties are growing over China that is the world’s second largest oil consumer andimporter. As rumors anticipate a Chinese economic crisis in July, oil market players are paying
attention to various problems in the Chinese economy. As the new Chinese leadership headed byPresident Xi Jinping has been expected to shift priority from growth to reforms, bearish projections
have emerged about Chinese demand for oil and other commodities. In addition, “shadow banking”
and other structural Chinese economic problems are now expected to emerge or deteriorate, making
the future course of the Chinese economic bubble problem more uncertain. After China’s demand
expansion had been driving up global demand for energy and other resources including oil until
recently, these structural problems’ deterioration is likely to greatly shake the market. As a matter of2

IEEJ: July 2013 All Right Reserved
course, the Chinese government may make utmost efforts to prevent such deterioration and minimize
these problems’ impact on its economy. Nevertheless, we may have to keep close watch on Chinese
factors in anticipating the future international oil situation or the overall global energy situation.

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