IEEJ：June 2021©IEEJ 2021
Special Bulletin
A Japanese Perspective on the International Energy Landscape (535)June 2, 2021

Brent Closed above $70/bbl for the 1st Time in 2 Years
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn June 1, the front-month Brent crude oil futures contract rose by $0.93 per barrel toclose at $70.25/bbl. The benchmark crude oil price rose above $70/bbl on an intraday basis in March,
but closed above the level for the first time in two years since it finished at $70.11/bbl on May 28,
2019. As crude oil prices got back on a recovery track after their free fall under the COVID-19
pandemic in 2020, Brent rose back above $60/bbl in February. It later surpassed $69/bbl,
approaching the $70/bbl level several times while falling short of closing above the level until theend of May. It topped the landmark level at last. The front-month futures contract on West Texas
Intermediate also gained $1.40/bbl from the previous day to close at $67.72/bbl on June 1. WTI
finished above $67/bbl for the first time in 31 months since it closed at $67.04/bbl on October 29,2018.
There have been various factors behind the recent crude oil price recovery including
Brent’s rise above $70/bbl. The most important factors may be a global economic recovery and an
oil demand increase. After plunging into the worst situation since the Great Depression due to thepandemic, the global economy got on a recovery path in the second half of 2020 thanks tounprecedentedly large economic stimulus packages implemented in major countries. Particularly, theUnited States and China have driven the global economic recovery. The International Monetary
Fund projected global economic growth in 2021 at 5.5% in its World Economic Outlook in January
but revised the projection upward to 6.0% in view of the latest economic recovery conditions. The
Organization for Economic Cooperation and Development raised its global economic growth
projection for 2021 from 4.2% announced in December 2020 to 5.6% in March and further to 5.8%
on May 31. The two international organizations’ upward revision of global economic growth
projections for 2021 reflected growing hopes on an end to the COVID-19 pandemic throughprogress in vaccination and the emerging effects of major countries’ economic stimulus packages.

As the global economy solidifies its recovery, global oil demand follows a steady uptrend
after overcoming the worst phase under the COVID-19 pandemic. In its latest monthly oil market
report (published in May), the International Energy Agency forecasts that global oil demand in 2021
would increase by 5.42 million barrels per day or 6.0% from 91.01 million bpd in the previous year
to 96.43 million bpd. The forecast rise would fall short of offsetting an unprecedented decline of
8.72 million bpd or 8.7% in 2020. As the global oil demand recovery is gradually gaining
momentum, however, global oil demand is increasingly expected to restore the pre-pandemic level in
2022. In the United States that leads the global economic recovery, gasoline demand is steadily
growing ahead of the summer driving season, making oil market sentiment bullish. The global
economic recovery and the subsequent steady increase in oil demand have turned around thesupply-demand balance in the international oil market and led the market to go in the direction ofequilibrium, pushing up crude oil prices.
As reiterated in this “A Japanese Perspective on the International Energy Landscape”
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report, we must pay attention to the fact that massive money provided to the market under powerful
fiscal spending and monetary easing to stimulate economic activities has flowed into crude oil
futures positioned as risk assets, supporting crude oil price hikes.
As global oil demand shows a steady recovery, we see attention-attracting oil supply
developments. Excluding the substantial oil demand decline under the pandemic, factors that haveexerted downside pressure on crude oil prices over the past several years included an increase innon-OPEC oil production supported by a substantial U.S. oil production expansion. However, theIEA forecasts that oil production by oil-producing countries outside the Organization of thePetroleum Exporting Countries in 2021 would increase by only 0.81 million bpd from 63.06 million
bpd in 2020 to 63.87 million bpd. Russia and some other non-OPEC oil-producing countries havecooperated with OPEC in cutting production, exerting a great impact on non-OPEC oil production.
Another important point is that the IEA forecasts U.S. oil production in 2021 to continue stagnation.
It estimates U.S. production in 2021 to fall by 0.16 million bpd to 16.41 million bpd. High-cost U.S.
shale oil production had been expected to restore its profitability and resume expansion if crude oil
prices rise back above $60/bbl. However, we see no such sign at present. Analysts say that U.S. shale
oil producers depending on external financing have switched their priority from quantity (productionexpansion) to quality (profitability). The recent absence of U.S. oil production expansion has
weakened downward pressure on oil prices, leading to the price hikes.
Further important is the effect of the OPEC-plus group’s production reduction policy thathas led to the rebalancing of supply and demand by continuing supply and demand adjustment while
watching demand growth and stagnant U.S. oil production. Since launching record production cutsin May 2020, the OPEC-plus group has micro-managed the supply-demand balance under theinitiative of its leader Saudi Arabia. This has helped global crude oil inventories to restore a normal
level. The OPEC-plus group has entered a process to phase out production cuts but is expected toadjust production in consideration of the oil supply-demand environment.
At its June 1 meeting that attracted global attention, the OPEC-plus group decided tonarrow production cuts in July as earlier expected. OPEC-plus decisions tended to become surprises
reversing earlier expectations, but the latest one met dominant forecasts. However, the decisionfalling within an expected range apparently indicates that the OPEC-plus group refrained fromsurprising the market and took a wait-and-see attitude in consideration of various potential turbulent
factors in the future international oil market.
Some turbulent or attention-attracting factors would bring about crude oil price hikes, butothers would trigger price drops. Depending on these factors and their impacts, future oil pricedevelopments will vary. In consideration of various possibilities, the OPEC-plus group might havetaken a wait-and-see attitude for the immediate future. Attention-attracting factors to push up crude
oil prices include the potential acceleration of the global economic recovery and relevant money
factors. In addition, we must pay attention to potential events causing oil supply disruptions, like therecent U.S. Colonial Pipeline shutdown. Attention-attracting factors regarding the Middle East
include a conservative hardliner’s potential victory in Iran’s presidential election in June, subsequent
regional geopolitical tensions and relevant concerns over oil supply disruptions.
Important factors to push down crude oil prices would be a successful U.S.-Iran nuclear
deal and Iran’s subsequent comeback to the international oil market in the second half of this year. Inaddition, I would like to pay attention to a rise in U.S. production that could come as crude oil pricehikes take hold. If concerns arise about the global economic recovery depending on somedevelopments regarding the COVID-19 pandemic, the oil market could become turbulent under the2

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influence of money factors.
While Brent has risen back above $70/bbl, crude oil prices can be expected to rise further
or drop sharply. The OPEC-plus group will continue to micro-manage the supply-demand balance
while responding to situational changes. It will then have to consider not only fiscal problems ofoil-producing countries but also its actions’ impacts on the global economy, the U.S. administration’s
reluctance to see gasoline price hikes and other factors politically and strategically.

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