Sam Fletcher
OGJ Senior Writer
HOUSTON, Mar. 16 -- The “Ides of March”—Mar. 15—left energy markets splattered with red as prices for most commodities were slashed. The front-month crude contract plunged 4% in New York as the crisis in Japan continued to threaten demand, while natural gas inched up 0.7% as expectations for increased LNG demand in Asia were partially offset by forecasts for milder weather.
“Concerns that Japanese demand for crude could be down for an extended period prompted profit-taking and panic selling,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “The power outages in Japan are also forcing the factories to adopt rolling blackouts and curtail industrial activity. However, once the rebuilding begins, demand is likely to surge.”
He said, “Fears of demand destruction even overcame the concerns about the prevailing tensions in the Middle East, where Muammar Gaddafi strengthened his position in Libya potentially gaining more leverage, and the king of Bahrain announced a state of emergency in the country as deadly clashes continued unabated.”
Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Crude prices suffered a very strong setback [Mar. 15], but the buy-the-dip patterns in place since the start of QE2 [the second phase of the Federal Reserve System’s quantitative easing program to stimulate the economy] are still visible….”
The equities market rebounded from intraday lows to end the day down 1%, “as upbeat commentary from the Federal Reserve System prevented a more severe loss related to nuclear concerns in Japan,” said analysts in the Houston office of Raymond James & Associates Inc. However, they said, “After falling a whopping 11% on Mar. 15, Japan's Nikkei index closed nearly 6% higher Mar. 16 following news reports of lower radiation levels at Japan's Fukushima nuclear power plant. The positive news gave confidence to investors, who were lured back into the market to capitalize on the buying opportunity.” Energy stocks fell with the broader market.
James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “The deep anxiety over Japan’s nuclear safety has prompted European Union countries to announce reviews on their nuclear power plants. Germany has shelved its plan to extend the operation life for its seven nuclear reactors built before the end of 2008, which represents approximately 35% of Germany’s total nuclear power generation capacity and 8% of its total power generation capacity from all energy sources.”
Energy commodities were “modestly lower” in early trading Mar. 16 “on reports that a reactor may have been breached at Fukushima, thereby raising the risks for radioactive leaks,” said Raymond James analysts. They added, “Meanwhile, oil is trading higher on escalated unrest in Bahrain, and natural gas is also trading higher.”
Meanwhile, Jakob said, “Some airlines have decided not to fly anymore to Tokyo, and if radioactivity emissions increase we have to consider the possibility that some ship owners start as well to be hesitant about sailing to eastern Japan. The naphtha crack is under heavy pressure, which will in turn pressure the gasoline crack; at current economics, refineries will remain in maximum distillate mode.”
Raymond James analysts observed, “While the West's focus—especially that of the media—has clearly shifted from North Africa to Japan, the Gaddafi regime appears to be taking advantage of the reduced spotlight on Libya by aggressively striking back at the rebels. After the military balance shifted last week in favor of the regime, this week Gaddafi's forces have overtaken the last city between them and the rebel capital at Benghazi.”
Meanwhile, the Group of Eight richest countries—the US, UK, France, Italy, Germany, Russia, Japan, and Canada—failed to agree to a no-fly zone in Libya, further worsening prospects for the rebels. “Any outside military aid for the rebels seems unlikely and would probably come too late given the recent advances by Gaddafi's forces…. While the prospect of a shorter civil war may help restore Libyan oil production more quickly, this is by no means certain. Yesterday, the International Energy Agency indicated it expects Libya's oil exports to be stalled for months as a result of damage to oil infrastructure and international sanctions (the latter unlikely to go away if Gaddafi ends up winning),” Raymond James reported.
Sharma said, “Iran upped the ante after commenting on the situation in Bahrain by saying that the presence of foreign troops in Bahrain is meddling into the country’s internal affairs, which would further complicate the situation. In response, Bahrain recalled its ambassador from Iran signaling the further deepening of the Shia-Sunni divide and potential for an even more explosive situation in the region.”
Zhang observed, “The persistent tensions in the Middle East and North Africa will continue to pose upside risks on price and volatility. It will take some time to better understand the real impact on oil demand and the economy from Japan’s natural disaster. We expect some short-term bearish sentiment from the quake before reconstruction starts off in a few months’ time.”
US inventories
The Energy Information Administration said Mar. 16 commercial US crude inventories increased 1.7 million bbl to 350.6 million bbl in the week ended Mar. 11, surpassing the Wall Street consensus for a 1.3 million bbl gain. Gasoline stocks fell 4.2 million bbl to 225 million bbl in the same period, well below Wall Street’s call for a 1.5 million bbl decrease. Both finished gasoline and blending components were down. Distillate fuel inventories dropped 2.6 million bbl to 152.6 million bbl, compared with analysts’ expectations of a 1.4 million bbl loss.
Imports of crude into the US increased by 381,000 b/d to 8.7 million b/d during that week. In the 4 weeks through Mar. 11, crude imports averaged 8.3 million b/d, which was 536,000 b/d less than in the comparable period last year. Gasoline imports averaged 648,000 b/d last week, with distillate fuel imports averaging 161,000 b/d.
The input of crude into US refineries increased 239,000 b/d to 14.2 million b/d last week with units operating at 83.4% of capacity. Gasoline production decreased to 8.7 million b/d while distillate fuel production declined to 4.1 million b/d.
Energy prices
The April contract for benchmark US light, sweet crudes fell $4.01 to $97.18/bbl Mar. 15 on the New York Mercantile Exchange. The May contract dropped $4.21 to $97.98/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $4.01 to $97.18/bbl.
Heating oil for April delivery declined 11¢ to $2.95/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 15.74¢ to $2.80/gal.
The April natural gas contract gained 2.7¢ to $3.94/MMbtu on NYMEX on “speculation that some of the LNG cargos, which generally start to head to the US after winter demand in Europe goes down, would get diverted to Japan,” said Sharma. “However, the near-term price support is largely muted due to the reduced significance of LNG imports in the US natural gas market. With spring weather setting in, prices are expected to remain in a narrow range around the current level (April straddle trading around 20¢) over the shoulder season.”
On the US spot market, gas at Henry Hub, La., dropped 10.7¢ to $3.80/MMbtu.
In London, the April IPE contract for North Sea Brent crude fell $5.15 to $108.52/bbl. Gas oil for April lost $11 to $952/tonne.
The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down $1.31 to $106.56/bbl.
Contact Sam Fletcher at [email protected].
Rystad Energy.
