Japan quake scrambles market

Sam Fletcher
OGJ Senior Writer

Crude prices dropped $2-3/bbl Mar. 11 at initial reports a massive earthquake and tsunami hit Japan—“the sixth-largest earthquake recorded anywhere in the world since 1900 and the largest to hit Japan since records began in the 1870s,” said analysts at the Centre for Global Energy Studies (CGES), London.

The front-month April contract “teetered around $100/bbl” in early trading Mar. 11 before closing at $101.16/bbl, down 2% for the day and 6% for the week to a 2-week low. Oil prices had slumped prior to the disaster amid signs the global economic recovery may be on the wane. It was still falling in early trading Mar. 14 on the New York Mercantile Exchange.

The quake’s epicenter was away from major cities, 100 km off the northeastern coast of Honshu Island, some 375 km northeast of Tokyo, prompting initial optimism of fewer deaths and less damage than the 1995 Kobe earthquake. However, the disaster shut down at least five Japanese-owned refineries with a total capacity of 1.5 million b/d—about a third of Japan’s total refining capacity, officials said. A major fire at Cosmo Oil’s 220,000-b/d Chiba refinery outside Tokyo continued burning over the weekend.

This obviously will limit Japanese demand for crude imports. However, with the loss of refining capacity, demand for residual oil and diesel should climb. The disaster “might put downward pressure on crude prices but will be supportive for product prices and crack spreads,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston.

Some 9.7 Gw of nuclear power generation—30% of Japan’s total nuclear power capacity and 7% of Japan’s total power generation capacity—were shut down, with one plant at risk of meltdown. “Although a large part of this shortfall could be met by the coal and petroleum-fired generation, much of this shut down capacity will be substituted by natural gas (LNG) fired power generation. Even if only 50% of the shut down nuclear capacity gets substituted by natural gas, this could result in over 1 bcfd of additional LNG demand,” Sharma said. Natural gas increased 1.65% to $3.95/MMbtu Mar. 11 on speculation more LNG will be diverted to Japan, but Sharma sees no immediate effect on the US market.

‘Day of Rage’
The Mar. 11 “Day of Rage” and mass protests promoted for weeks by dissident bloggers in Saudi Arabia fizzled into “a day of reluctance” as few protestors took to the streets in that conservative kingdom.

News services reported a few hundred protestors turned out only in Hofuf, Awwamiya, and Qatif demanding release of political prisoners. Earlier, a senior cleric from Saudi Arabia's Shia minority was arrested after calling for democratic reforms, raising some fears in the market of a potential Shia uprising against the Sunni monarchy (OGJ Online, Mar. 3, 2011).

Sharma earlier said major protests in Saudi Arabia could potentially have much bigger and far-reaching consequences than the fighting in Libya (OGJ Online, Mar. 8, 2011). However, he subsequently reported, “The call for protests in Saudi Arabia lost some of its traction under criticism from the religious scholars in the country.”

He predicted, “Crude would retreat below $100 if the Saudi ‘Day of Rage’ protests fizzle out. However, if the protests in Saudi Arabia gain traction even $150/bbl would look within reach very quickly.”

The front-month futures price in New York spiked late in the Mar. 10 session on reports that police injured several protesters that day in Qatif. “A headline of Saudi police ‘firing’ at protesters sent crude oil $3/bbl higher in 10 min,” said Olivier Jakob at Petromatrix, Zug, Switzerland. The pre-Day of Rage protest on Mar. 10 “was not a significant one in terms of size,” Jakob noted. But a price jump on rumors of street violence “highlights the market’s nervousness over Saudi Arabia [and] also the difficulty in forecasting the ‘what’s next' events (Tunisia, Egypt, Bahrain, Libya: they all developed much quicker than expected).”

(Online Mar. 14, 2011; author’s e-mail: [email protected])