MARKET WATCH: Japanese earthquake fells oil prices in early trading

Oil prices fell some $2/bbl in early trading Mar. 11 on reports a massive earthquake and huge 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.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 11 -- Oil prices fell some $2/bbl in early trading Mar. 11 on reports a massive earthquake and huge 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.

In early trading in New York, the price of crude “teetered around $100/bbl after an 8.9 magnitude earthquake generated a devastating tsunami off the coast of Japan—one of the largest net oil importers in the world,” said analysts in the Houston office of Raymond James & Associates Inc. That followed declines in oil prices in the previous three trading sessions through Mar. 10.

The quake’s epicenter was 100 km off the northeastern coast of Honshu Island, some 375 km northeast of Tokyo. Much of Japan’s infrastructure is designed to stop automatically in the event of a major earthquake. Five Japanese-owned refineries with 1.06 million b/d aggregate throughput capacity were shut down; a major fire was reported at Cosmo Oil’s Chiba refinery outside Tokyo.

“Since the earthquake and subsequent tsunami were, thankfully, centered away from major cities, the death toll and property damage should be relatively moderate (compared with the Kobe earthquake in 1995). The three northern prefectures most directly affected by the tsunami—Fukushima, Miyagi, and Iwate—have a combined population of approximately 6 million vs. over 30 million in the Tokyo metro area alone,” said Raymond James analysts. “Thus, the overall impact on energy consumption should be proportionately modest.” Reports so far indicate that have been shut, mainly on a precautionary basis.

The four nuclear power plants closest to the earthquake also were shutdown, with a fire reported at one. This could offset the reduction in oil demand caused by the shut-in refineries, Raymond James analysts said. “When Japanese nukes temporarily go off line, the usage of oil and natural gas (LNG)—all of it imported—tends to increase as the country runs more thermal generation,” they noted.

Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, said, “Although difficult to quantify at this stage, the events in Japan are likely to be most relevant for the energy and industrial metals sectors. Disruptions to the country’s nuclear and hydro facilities are likely to see increased thermal coal and LNG imports while iron ore and nickel demand could be negatively affected by possible short term disruption to the domestic steel industry.”

Crude fell ‘hard’
In the Mar. 10 session, crude “fell hard early on negative economic data but pared losses late in the day following news of Saudi unrest (crude still closed down 1.6%),” said Raymond James analysts. “Saudi's Shia minority have planned a ‘Day of Rage’ for today [Mar. 11], which could send additional tremors through the oil markets.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Oil ended the day lower yesterday despite a late-session $2/bbl spike on news of the demonstrations in Saudi Arabia.” The front-month spread between West Texas Intermediate and North Sea Brent spread widened further following a sizable inventory build at Cushing, Okla. “Despite the weakness in flat prices, term structures for WTI, Brent, and ICE gasoil all strengthened,” Zhang said.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “With Brent increasing its premium to WTI, the end-users will not see much of a reduction in the price they pay at the pump, and consumer confidence is at risk if the higher gasoline prices come together with weaker equities. Gasoline prices in Europe are already at levels comparable to the peaks of 2008.” But not diesel prices “due to the greater cracks back in 2008.” However, Jakob said, “Levels are not that far away.”

Zhang said, “The turmoil in the Middle East and North Africa [MENA] is still a leading driver of the oil market. The oil spike late yesterday showed that the market was still extremely sensitive to developments in this region.”

However, he said, “The oil market appeared to have shifted its focus slightly away from supply disruption from MENA to bearish demand outlook on mixed economic news yesterday. The US weekly jobless claim numbers came in worse than expected. High oil prices has caused US January trade balance [to worsen] significantly and prompted China to report its first trade deficit in 11 months. Although the Chinese trade deficit in February was also attributable to the Chinese New Year effect, it weighed on the market nevertheless.”

Zhang added, “Renewed concerns over the European debt crisis have caused euro to give back more than the gains made on the back of European Central Bank’s hawkish message last week. Also, with the backdrop of mixed economic news and persistent high oil prices, we saw general risk-off moves yesterday in many markets including oil, metals, and equities. China reported its February Consumer Price Index at 4.9% this morning, which could fuel speculation of further tightening from China.”

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “While the European sovereign debt issues will continue to reemerge time and again as it is more of a structural problem [that] will take a long time to correct, the Middle Eastern geopolitical risk is what will continue to call the shots in the near term. We think that despite the Libyan supply risk (which we think is largely already priced in) 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.”

Sieminski said, “Geopolitical risk lingers and there has been a further upgrading in the oil price spike risk scenario over the past week. The market now attaches a 23% probability of the December 2011 Brent contract expiring above $150/bbl. This level of oil price is important, in our view, since we believe it represents the level at which world growth would contract by 2-2.5% and hence push the world economy back into recession.

Jakob observed, “A lot of expectations are built over today’s ‘Day of Rage’ in Saudi Arabia. Yesterday a headline of Saudi police ‘firing’ at protesters sent crude oil $3/bbl higher in 10 min. Yesterday’s protest was not a significant one in terms of size, but this 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).”

He said, “Fighting continues in Libya, but we think that a full interruption of Libya exports is now priced-in and markets will react more to Saudi than to Libya headlines. The Arab League meets Mar. 12, and one of the main topics will be the no-fly zone over Libya. The West is waiting for official support from the Arab League before moving further on the idea of a no-fly zone.”

Energy prices
The April contract for benchmark US light, sweet crudes dropped $1.68 to $102.70/bbl Mar. 10 on the New York Mercantile Exchange. The May contract fell $1.69 to $103.92/bbl. On the US spot market, WTI at Cushing was down $1.68 to $102.70/bbl in step with the front-month futures contract.

Heating oil for April delivery decreased 2.58¢ $3.04/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month dipped 0.76¢ to $3.02/gal.

The April natural gas contract lost 10¢ to $3.83/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 1.5¢, also to $3.83/MMbtu.

In London, the April IPE contract for North Sea Brent crude retreated 51¢ to $115.43/bbl. Gas oil for March was unchanged at $964.50/tonne.

The average price for OPEC’s basket of 12 reference crudes advanced 75¢ to $110.71/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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