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Crude Oil Prices And The Japanese Disaster: The Herd Got It Wrong

Commodities / Crude Oil Mar 13, 2011 - 11:55 AM GMT

By: Andrew_McKillop

Commodities

JAPAN'S OIL DEMAND WILL BOUNCE BACK
Friday 11th trading on the US Nymex and to lower extent on the London ICE was driven by a quick sentiment-driven response to breaking news of the Japanese disaster. Refineries were on fire, ports were closed and cars, buses and trucks were floating like jetsam, in the raging tsunami. Oil traders surmised that Japan's oil demand and its import draw on world supply were both set to fall and prices were sharply marked down through the day.


FRIDAY TRADERS MADE A WRONG WAY BET – BUY ON THE DIP
We can ask how the Herd got it wrong, and the answer is they made a mistake in all kinds of ways. Even in the short term, probably within at most a week, Japan's oil demand and therefore its call on world export supply will be up.

The reasons are multiple.

 Japan is faced by a major catastrophe. Heavy transport, cranes and earthmoving equipment, diggers and dozers will be moving into action fast. Some of these machines use a couple of barrels per hour, and both helicopter and airplane movements will be up in the ongoing rescue effort. Electric power plants have been hit, and the energy shortfall will be made up in part with oil-powered gensets. Worried Japanese will be driving where they can, when they can, and filling up on oil at every station they can find with remaining supplies. While the weather stays unusually cold in Japan, oil heating demand will also be up.

NUCLEAR POWER
The next reason that will make oil prices bounce, and can speed Japan's oil demand recovery is the massive damage to nuclear power plants and the image of nuclear power in Japan.
Both on fundamentals and on sentiment, when nuclear power takes a hit oil will gain. We do not yet exactly know how many nuclear plants are seriously damaged, and could explode like the 1986 Chernobyl disaster, but every reactor that is down will lever up oil demand.

Sentiment will translate that to an outsized rise for oil futures, with the rise getting bigger every day the Japanese government has to sidestep and parry questions on their ageing nuclear plants and how well, or how badly they resist earthquakes and tsunami.

Worldwide concern about nuclear power's safety and real ability to deliver cheap electricity, and its real ability to save oil will grow, as the Japanese disaster deepens and more information trickles out. Whenever more balanced truthful information about nuclear power emerges, oil will always gain.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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