MARKET WATCH: Natural gas price climbs as Japan nuclear crisis deteriorates

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 15 -- The front-month natural gas price gained 0.7% Mar. 14 on the New York Mercantile Exchange and gas oil term structure strengthened in London on prospects of increased demand in Japan as radiation spread from the Fukushima Daiichi nuclear plant damaged by last week’s earthquake and tsunami.

The front-month crude price closed up a few cents Mar. 14 on NYMEX. However, it dropped below $100/bbl in Asia trading and dipped to a 2-week low around $99/bbl in early trading Mar. 15 in New York as the worsening nuclear crisis undercut Japan’s economy—the world’s third largest.

“Anxiety over Japan’s nuclear plants prompted a further sell-off across many markets yesterday. However, oil bounced back later on news that the Saudi army had moved into Bahrain,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

Saudi Arabia and other Arab states sent troops, drawn from the Gulf Cooperation Council, to protect Bahrain’s oil and power facilities and other key installations. “This follows escalation of protests in Bahrain over the weekend, threatening the ruling of the current government,” Zhang reported. “The turmoil in the Middle East and North Africa region will continue keep the oil market wary.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “On [Mar. 11] the protests did not come to Saudi Arabia [when a blog-stimulated ‘Day of Rage’ fizzled], so on [Mar. 14] Saudi Arabia went to the protests. Saudi Arabia and the UAE sending troops to Bahrain is an additional twist to the geopolitical picture in the Middle East.”

Jakob observed, however, “The market has had a lot of time since the start of the year to price in a premium for geopolitical developments in the Middle East, while the situation in Japan is an ongoing fresh development [that] has not had the time yet to be priced in. We would therefore remain cautious on flat price length until a clearer picture emerges out of Daiichi that things are under control.”

Zhang said, “Japan’s Fukushima Daiichi nuclear plant was hit by a third explosion [the morning of Mar. 15]. The government has admitted that radiation from the plant has reached dangerous level within a 30 km circumference. Higher-than-normal level of radiation also detected in Tokyo, 250 km away from the plant. Japan’s stock market was sold off heavily with the Nikkei [stock market index for the Tokyo Stock Exchange] down 11.55%. Other major equality markets also followed with sharp downside moves.”

He said, “It’s highly likely global economic growth will be lower than previously thought due to the loss of production caused by the quake, as Japan represents more than 8% of global gross domestic product and is a major trading partner for many other economies.”

Zhang said, “In response to the disaster, Japan announced a release of 8.9 million bbl of oil from its strategic reserve, which is held by private companies as mandatory stocks. About one third of Japan’s refining capacity was forced to shut down by the earthquake…. We believe that refining margins are likely to be supported by the loss of the refining capacity. In addition, Japan’s commercial oil stock was at a historic low prior to the quake; imports of oil products will also be needed to meet the demand.”

Meanwhile, he said, “Uncertainty over economic impact from Japan’s earthquake grips the market. It is likely large fund outflow from the oil market has been taking place, similar to other risky asset market.”

Energy prices
The April contract for benchmark US sweet, light crudes inched up just 3¢ to $101.19/bbl Mar. 14 on NYMEX. The May contract dropped 16¢ to $102.19/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 3¢ to $101.19/bbl.

Heating oil for April delivery increased 3.48¢ to $3.06/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 2.74¢ to $2.96/gal.

The April contract for natural gas gained 2.5¢ to $3.91/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 11.5¢, also to $3.91/MMbtu.

In London, the April IPE contract for North Sea Brent decreased 17¢ to $113.67/bbl. Gas oil for April gained $4.25 to $963/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down $1.31 to $107.87/bbl.

Contact Sam Fletcher at samf@ogjonline.com.