IEEJ：August ©IEEJ 2024
Special Bulletin
A Japanese Perspective on the International Energy Landscape (701)August 9, 2024

Crude Oil Prices Shaken by Global Economic Instability and Geopolitical Risks
Ken Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, JapanAs new uncertainties have arisen in the outlook for crude oil prices, future developments areattracting attention. In early August, stock markets plunged globally. On August 5, the Dow Jones
Industrial Average on the New York Stock Exchange and the Nikkei stock average on the Tokyo Stock
Exchange fell sharply, exerting downside pressure on crude oil prices. As stock prices subsequently
picked up, however, crude oil prices turned up. Nevertheless, tensions in the Middle East haveintensified over Iran and Israel, forcing markets to brace for the development of geopolitical risks.
Depending on how these two important factors unfold in the future, the global economy and theinternational situation will be affected significantly, leading crude oil prices to swing significantly both
upward and downward.
In early August, stock markets were shaken significantly. On the New York Stock Exchange,
the Dow Jones Industrial Average lost 495 points on August 1 and plunged by 611 points to 39,737 on
August 2, after remaining above 40,000 in July. As market turmoil failed to subside on August 5 aftera weekend, the average suffered a 1,034-point plunge, sinking to 38,703.
On the Tokyo Stock Exchange, the Nikkei average posted an even sharper decline. After
hitting an all-time high above 42,000 in mid-July, it gradually declined in the second half of the month,reaching 39,102 on July 31. The Nikkei average fell by 975 points to 38,126 on August 1 and by 2,217
points to 35,910 on August 2, before plunging by 4,451 points to 31,458 on August 5. It lost more than
7,600 points in three market days, falling more than 10,000 points from the record high in July. The
sharp stock market decline was not limited to New York and Tokyo but spread to Europe and Asia.
Until the beginning of August’s second week, the global stock market crash shook global financial
markets.
Behind this global stock market crash have been uncertainties about the outlook for theglobal economy, especially the U.S. economy and the Chinese economy. I refrain from commenting
on Chinese economic issues that were covered by my previous essay -- A Japanese Perspective on theInternational Energy Landscape (700). In the United States, with the world's largest economy, as well,
anxiety and concerns have grown about the economic outlook. In particular, the July jobs report
included a slower-than-predicted increase in nonfarm payrolls and an unemployment rate of 4.3%, thehighest since October 2021, making market participants nervous about the outlook for the U.S.
economy. As a result, anxiety grew about a hard-landing economic slowdown accompanied by a sharpdeterioration, dampening the mainstream view that the U.S. economy would make a soft landing. Thismight have triggered the flight of funds from risk assets.
Heightened uncertainties about the U.S. economic outlook led to widespread speculationthat the U.S. Federal Reserve would cut interest rates, bringing about various ripple effects in a sense.
In late July, the Bank of Japan at its monetary policy meeting decided to raise interest rates further,1IEEJ：August ©IEEJ 2024
triggering the Japanese yen’s rapid appreciation against the dollar and a Japanese stock market decline.
The yen appreciated against the dollar on Japan's decision to raise interest rates and the expectation ofU.S. rate cuts, causing a reversal of carry trade positions that might have accelerated the stock market
decline. The carry trade, in which investors raised yen funds for investment in view of Japan’s ultralowinterest rate policy, produced losses due to the yen’s appreciation and the BOJ’s rate increase, leading
investors to sell shareholdings to cover carry trade losses, according to market sources. In the midstof this vicious cycle, panic selling brought about stock market crashes in Tokyo and New York.
Heightened uncertainties about the outlook for the global economy were combined with thewithdrawal of funds from risk assets to exert downside pressure on crude oil prices. The daily closing
price of the front-month futures contract for the West Texas Intermediate crude dropped by nearly $5
per barrel from $77.91/bbl on July 31 to $72.94/bbl on August 5. Crude oil prices had been on adownward trend since the beginning of July due to concerns about the global economy, particularly
the Chinese economy, before being destabilized by the global stock market crash.
However, stock markets have restored a certain level of stability since August 6, avoiding afree fall. The Dow Jones Industrial Average gained 294 points on August 6, halting its decline. After
falling back by 234 points the next day, it posted a sharp rally of 683 points to 39,446 on August 8.
The Nikkei average staged a steep rally of 3,217 points on August 6 after the previous day’s historiccrash. It gained 414 points on August 7 and fell back by 258 points to 34,831 the next day. The rallycame as buybacks swelled in reaction to the excessive crash on August 5, with economic indicators
contributing to preventing further stock market deterioration. As a result, crude oil price falls came toa halt, with WTI rising back to $76.19/bbl on August 8. Since the beginning of August, global financial
markets have thus been turbulent due to the stock market crash, leaving future developments
unpredictable. Would global financial markets make a soft landing or a hard landing? Depending on
future developments regarding the U.S. economy, the Chinese economy, and the global economy, themarkets could fluctuate wildly again.
Meanwhile, another important uncertainty factor that could have a direct significant impact
on the crude oil market is attracting global attention. Geopolitical risks could shake the internationalsituation due to the potential escalation of tensions in the Middle East. On July 31, the Palestine Hamas
group, locked in fierce fighting with Israel, announced that its top leader Ismail Haniyeh was killed
by Israel while he was visiting Tehran to attend the inauguration of Iran’s new President MasoudPezeshkian. Hamas vowed to retaliate against the Israeli action, with revenge against Israel pledged
by Iran, where the Hamas leader was killed. When and how Iran, Hamas, and their supporters would
retaliate against Israel has become a matter of great concern to the world. Although Israel has notofficially acknowledged the killing, it has warned that retaliation and attacks against Israel would haveserious consequences.
For Iran, where a key person invited to the inauguration ceremony of the new president waskilled, retaliation against Israel is an obligation and inevitable. However, Iran hopes to avoid any
situation in which its retaliation against Israel would escalate into a full-fledged confrontation withIsrael and the United States. When Iran and Israel carried out missile attacks on each other in April,
Iran exercised self-restraint to avoid such escalation, calming down the situation. This time, too, theUnited States, Europe, Russia, and Iran’s Middle East neighbors have urged Tehran to exercise selfrestraint. Iran itself hopes to avoid any escalation, as noted above. Once retaliation is implemented,
however, it cannot be ruled out that there will be any unforeseen circumstances or uncalculated events.
There are growing concerns that retaliation could lead to a scenario where the Middle East as a whole
would be destabilized in a manner to affect its oil supply. In the worst-case scenario that affects oil2

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supply from the Middle East, oil prices could rise sharply.
Crude oil prices will thus continue to be shaken by the global economic instability
symbolized by the stock market destabilization and the Middle East situation. Caution is required in
the future.

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