IEEJ：January 2018 ©IEEJ2018
Special Bulletin
A Japanese Perspective on the International Energy Landscape (358)January 12, 2018

Brent Topped $70/bbl Temporarily
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Crude oil prices are rising remarkably. On January 11, the key Brent futures price hit an
intraday high of $70.05/bbl. It closed the day at $69.26/bbl, rising for the fourth straight trading day
though falling short of ending above $70/bbl. The Brent futures price topped $70/bbl briefly for thefirst time in three years and one month since early December 2014. On the same day, the key West
Texas Intermediate futures price closed at $63.80/bbl, the highest in three years and one month,approaching $65/bbl.
What happened to crude oil prices? Has the situation changed really? Energy stakeholders
are now interested in these questions. In a crude oil price fall that started in the second half of 2014,
Brent slipped below $70/bbl in December of the year as noted above and remained slack for morethan three years. In 2017, the average price stood at $54.7/bbl for Brent and $50.9/bbl for WTI,
falling short of exceeding $55/bbl as an average. However, Brent hit the year’s low below $45/bbl inJune and gradually and basically crept up before rising back above $60/bbl in late October for the
first time in two years and three months. At last, it is reaching $70/bbl.
There are various factors behind the recent oil price hikes, which have been combined topush up oil prices. Basically, however, a market change toward a supply-demand equilibrium isimportant, symbolized by declining oil inventories. Inventories have declined on firm growth inglobal oil demand and OPEC and non-OPEC oil producing countries’ coordinated production cut
that started in the beginning of 2017. OECD oil inventories declined to 2.94 billion barrels in
October 2017 after standing at 3.07 billion barrels, far above the past five-year average in January
2017. They might have fallen toward the end of 2017. Even though oil inventories are still higher
than the past average, the market has undoubtedly gone in the direction of a supply-demandequilibrium.
In addition, some new important factors have been influencing the oil market since thesecond half of last year. First, they include geopolitical risks. Behind Brent’s rebound above $60/bbl
were tensions involving the Kurdish situation in Iraq. Later, many royal family members and cabinet
ministers were arrested and detained in Saudi Arabia and protests came against U.S. President
Donald Trump’s recognition of Jerusalem as the capital of Israel. These events to increase
geopolitical risks in the Middle East shook the oil market. Late last year, large-scale anti-government
rallies occurred in Iran, attracting global attention. These geopolitical risks have not necessarily
exerted direct influence on oil supply in the region. Geopolitical risks in the Middle East as a global
oil supply center, though having failed to attract attention from market players amid oversupply inthe past few years, have been importantly recognized as factors pushing up crude oil prices in a
run-up toward a direction for supply-demand equilibrium.
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Market players have become sensitive to events affecting oil supply, including an oilsupply decline (about 100,000 bpd) caused by an oil pipeline bombing in Libya late last year and aproduction decline (about 200,000 bpd from the middle to the end of 2017) in Venezuela amid
economic and social destabilization under heavy inflation. The market has grown more alert todestabilization in the Middle East and other major oil producing regions and its impact on oil supply.
Second, expectations of continuously robust global economic growth have exerted
influence on the market. The International Monetary Fund has forecast global economic growth toaccelerate slightly from 3.6% in 2017 to 3.7% in 2018. In addition, the U.S. economy has been
growingly expected to gain momentum on the enactment of a massive tax cut bill late last year after
sustaining firm growth. As a matter of course, greater global economic growth can accelerate oil
demand growth. As oil supply is expected to expand in 2018 on a shale oil production increase as
discussed below, whether oil inventories will decline in 2018 as seen in 2017 is difficult to predict.
In any case, however, expectations of economic growth acceleration may be supporting and pushingup oil prices.
In the United States, particularly, stock price hikes have accelerated in a manner to reflect
expectations of tax cut effects, contributing to raising expectations of economic growth. The Dow
Jones industrial average on the New York Stock Exchange rose above 25,000 in the beginning of2018 and increased to 25,575 on January 11. Stock price hikes have been seen not only in the UnitedStates but also in other countries including Japan, indicating that the global economy has made agood start in 2018. In addition to economic growth, record U.S. cold waves and other severe winterconditions in major countries have contributed to boosting oil demand and pushing up oil prices.
Third, a financial factor is pushing up oil prices amid robust economic growth and global
stock market hikes. Continuous stock price hikes have led to a “risk-on” market environment in theworld, encouraging investors to pour money into crude oil futures and other relatively “higher risk”
assets. On the New York crude oil futures market, the latest net buying by “non-commercial” traders
including speculators reached an unprecedentedly high level well above $600 million barrels
equivalent. Behind the money inflow into the oil futures market is a complex combination of moves
toward an oil supply-demand equilibrium, growing geopolitical risks and their influence. Various
factors involving the oil market have been combined to bring about oil price hikes so far.
While the international oil market faces this new situation, it is uncertain whether crude oil
prices will remain at current levels or rise continuously. In this respect, we must pay attention first to
oil supply growth resulting from price hikes. Particularly, how U.S. shale oil production will be
accelerated is attracting attention. Shale oil production features short investment cycles and increases
several months after oil price hikes. U.S. oil production growth in 2018 is estimated at about 1
million bpd or more. How the growth would accelerate on the recent oil price hikes will greatly
influence the future supply-demand balance in the world oil market.
Another focus of attention is how many “bubbly factors” are among those supporting oil
price hikes at present. If there are any “bubbly factors”, the problem may be how long such factors
would be sustained. One such factor is the stock market upsurge. Some analysts are alert to thefuture course of stock prices. Some development could prompt money to flow out of the current
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IEEJ：January 2018 ©IEEJ2018“risk-on” market, into which money is now flowing, exerting great influence on oil prices. We
should closely watch future developments in the global economy and international financial markets.
As a matter of course, we must not forget the current market situation in which oil pricehikes could accelerate in the event of faster global economic growth or the emergence and deepeningof geopolitical risks or oil supply disruptions. Any change in the market situation and its direction
are attracting much attention.

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