Japan's disaster causing oil markets to adjust

[News_Editor]

Japan's disaster causing oil markets to adjust

2011-03-17 08:42:21 GMT+7 (ICT)

SINGAPORE (BNO NEWS) -- Last week's massive earthquake that struck Japan, causing a devastating tsunami and an ongoing nuclear crisis is having significant repercussions in global energy markets, a report by international energy price agency Argus Media said.

According to the report, Japan will likely rely more on oil for power generation at least until the end of the year, altering regional balances for some grades of crude and providing a large boost in demand for low-sulphur fuel oil (LSFO). It will probably also seek additional LNG supplies.

Argus estimates that making up for the lost nuclear capacity following last Friday's natural disaster will require additional fuel oil and crude demand of up to 300,000 barrels per day.

However, this extra oil demand will be tempered by the damaging effects of the natural disasters on Japan's economy. Lower gross domestic product (GDP) growth over the next six months would pull down overall oil demand growth, but reconstruction efforts would then begin, leading to rising demand in the fourth quarter.

The quake and tsunami knocked nuclear plants with 11GW of generating capacity off line, and another 1.1GW nuclear plant was shut for maintenance at the time, leaving 25pc of Japan's nuclear capacity shut after the disaster.

Tokyo Electric Power's (Tepco) 4.7GW Fukushima-Daiichi nuclear power station is causing most concern following explosions and radioactive leaks.

In addition, Tepco shut 12 more thermal generation after the earthquake, including three gas-fired combined cycle units. Meanwhile, utility Tohuko closed 9 thermal power generation units because of the quake, including two gas-fired combined cycle units.

The loss of nuclear units accounts for a high percentage of base-load capacity. This is in addition to widespread damage to other critical power infrastructure such as transmission lines and transformer stations.

As Tepco and other utilities have warned customers to expect rolling blackouts of three to four hours every day, Japan's GDP will probably be affected even more.

All in all, the report indicates that Japanese demand for crude and fuel oil for generation will add upward pressure to already high oil prices, with the rise spread across many grades of crude and fuel, rather than being led by one particular product.

However, Japan will likely face some problems in securing adequate supplies of LSFO and direct-burn crude.

During the last major nuclear crisis, Indonesia was a regular exporter of Japan's preferred grade of fuel oil - low-sulphur waxy residue (LSWR) - as well as burning crudes, such as Minas, but Indonesia is now a net crude importer and rarely exports LSWR or Minas in significant quantities.

Furthermore, Indonesian state-owned oil company Pertamina stopped exporting LSWR since late last year.

Alternatives to LSWR face environmental hurdles, the report noted. The Japanese government imposes a 0.5pc limit on sulphur content in fuel oil for burning by power generators, and they tend to use 0.3pc sulphur fuel oil. High-sulphur fuel oil typically contains up to 3.5pc sulphur, far above Japan's anti-pollution limits.

With the already increased prices of LSFO as exporters struggle to find suitable qualities for the Japanese market, the increase in demand for oil for power generation from Japan will tend to support heavy crude, from which more fuel oil can be made, especially heavy sweet crude, with low sulphur content.

Meanwhile, Japan's private sector will be facing planned rolling blackouts, which will likely have a strong impact on businesses such as vehicle manufacturers.

According to Argus, in the first stage of Japan's disaster recovery, lower economic activity will cut oil demand levels - especially for transport fuel and naphtha - partly offsetting the rise in fuel oil and crude consumption.

However, oil demand will rise faster in the second half of the year, as reconstruction efforts boost GDP. In addition to the extra fuel oil and crude demand for power, the economy will need more diesel for construction work and transportation. Consequently, the increase in transport sector demand is likely to affect gasoline and jet fuel consumption.

The initial reaction to the quake and tsunami has been a drop in oil prices, as markets concluded that oil demand would be lower in the short term, and perhaps in the longer term because of the economic fallout.

Nonetheless, Japan's economic problems over the last 20 years of stagnation have had little knock-on effect on most other economies, so fears about lower global GDP growth rates and oil demand growth may be overstated.

-- © BNO News All rights reserved 2011-03-17

[EnSvenskTiger]

http://www.themoscowtimes.com/business/article/kudrin-sees-oil-at-150-200/432723.html

"Oil prices may surge to between $150 and $200 a barrel as a result of political turmoil in the Middle East and the crisis in Japan in a "speculative and short-lived" increase, Finance Minister Alexei Kudrin said at a conference in Moscow on Wednesday."

Hard to foretell but to hope for a lower oil price is not realistic.

Tiger