Best of the Week
Most Popular
1.Election Forecast 2015 - Opinion Polls Trending Towards Conservative Outright Win - Nadeem_Walayat
2.UK Solar Eclipse - End Time Sign, Judgement Day, Doomsday! - Nadeem_Walayat
3.Gold And Silver - When Will Precious Metals Rally? Not In 2015 - Michael_Noonan
4.Preparing for the Next Stocks Bear Market - Forecast 2015-2016 - Gary_Savage
5.Is a Stock Market Crash Imminent? - David Eifrig
6.Gold Price Slumps as US Dollar Soars, What's Next? - Nadeem_Walayat
7.US Dollar Forex Pairs and Gold Chartology - Rambus_Chartology
8.Election Forecast 2015: The Day Labour Lost the General Election - Nadeem_Walayat
9.The ECB Should End QE Next Month - EconMatters
10.Silver Price Poised to Surge - Zeal_LLC
Last 5 days
Stock Market Downward Spiral of Dumbness - 26th Mar 15
The Monetary Approach Reigns Supreme - 26th Mar 15
Stock Market Large Gap Down, Despite the Algos' Push Back - 26th Mar 15
Crude Oil Surges, Gold price Spikes as Middle East Tensions Escalate - 26th Mar 15
The U.S. Housing Market Recovery Is Fabricated Optimism - 26th Mar 15
Why Yemen Is The Next Saudi-Iranian Battleground - 26th Mar 15
The Crude Oil Price Crash and China Economic Slow Down - 26th Mar 15
Global Financial Markets Are More Distorted Than Ever Before - 26th Mar 15
One More Stock Market Rally and Then a Huge Drop Expected - 26th Mar 15
Danger Will Robinson - Stock Market Crash Warning - 25th Mar 15
Learn the Basics of Corrective Elliott Waves - 25th Mar 15
Why CNBC Is Hazardous to Your Financial Health! - 25th Mar 15
Will Your Retirement Accounts Survive The Coming Tax Code "Revolution"? - 25th Mar 15
US Dollar - Americas Phoenix - 25th Mar 15
California’s Epic Drought: Only One Year of Water Left! - 25th Mar 15
What’s Wrong With Silver? - 25th Mar 15
SPX Futures Appear Weak. WTIC and Gold May Be at Max Retracement - 25th Mar 15
We’re at the Dawn of a “New Energy Age” - 25th Mar 15
A Very Weak U.S. Economic Recovery - 25th Mar 15
Zero UK CPI Inflation Rate Prompts Deflation Danger Propaganda For Fresh Money Printing - 25th Mar 15
Stock Market NYSE Hi-Lo Index Aggressive Sell Signal - 24th Mar 15
Palladium Commodity Price Forecast - 24th Mar 15
Bitcoin Price Gearing Up for a Fall - 24th Mar 15
Safety Deposit Boxes In UK Being Closed By ‏HSBC – Not Closing Gold Vaults - 24th Mar 15
Japan Short Term Gains And Long Term Disaster - 24th Mar 15
China's Fragile Evolution - 24th Mar 15
David Cameron Announces Resignation Even Before Being Re-elected, Handing Labour 6 Seats - 24th Mar 15
City of London's Ownership of American Colonies - 24th Mar 15
Stock Market Reversal May Have Begun - 24th Mar 15
Casey Gathers Top Gold Experts to Share Secrets for Making Money in Any Market - 24th Mar 15
Thoughts on The Current Crude Oil Market - 24th Mar 15
U.S. Economy Still on Life Support - What Your Governments Hiding From You... - 24th Mar 15
UK Election Forecast 2015 - Budget Bribes Fail, SNP Insurgency Catastrophe - Video - 24th Mar 15
Is Stock Market Minor Top Taking Hold? - 23rd Mar 15
Greece and EU Running Out of Time as Bank Runs Intensify - 23rd Mar 15
Stock Market Slightly Negative Expectations Following Last Week's Rally - 23rd Mar 15
This Rising Interest Rates Play Could Make You a Quick 55% - 23rd Mar 15
Platinum Commodity Price False Break Low - 23rd Mar 15
The Real Reason The American Dream is Unraveling - 23rd Mar 15
Election Forecast 2015 - Budget Bribes Fail to Impress Voters, Tory's Lose Seats in Opinion Polls - 23rd Mar 15
Silver Price Reliance During U.S. Dollar Rally - 23rd Mar 15
Gold Price Outlook Dramatic Improvement Following US Dollar Topping Action - 23rd Mar 15
Wall Street Doesn't Want You to Do This - 22nd Mar 15
The "Natural Interest Rate" Is Always Positive and Cannot Be Negative - 22nd Mar 15
Exploring The Gold Market: The Fed, The Charts. The COTS and GLD - 22nd Mar 15
Stocks Bull Market Continues - 22nd Mar 15
Gold And Silver - China's AIIB Spells U.s. Dollar Demise, Not Clear For Precious Metals - 22nd Mar 15
Cocoa Commodity Price Technical Outlook - 21st Mar 15
Yield Curve, Futures, Suggest No U.S. Interest Rate Hike Until December - 21st Mar 15
Three Iconic Stocks Are Poised for a Dive - 21st Mar 15
We're All Hedge Funds Now! - 21st Mar 15
Why Stock Market Seasonality May Be Critical in 2015 - 20th Mar 15
Yellen's Tiger Riding Dilemma Keeps Interest Rates Near Zero - 20th Mar 15
FOMC is boxed in, Gold and Silver - 20th Mar 15
Silver Price Poised to Surge - 20th Mar 15
Why Aren’t These Investors Worried About The Gold Price? - 20th Mar 15
Gold Price Downside $850/oz; Upside Jump to $2,000/oz on ‘Grexit’ - 20th Mar 15
Cheap Paper Money - Precious Metals Technical Outlook - 20th Mar 15
Best Cash ISA vs Budget 2015 Scrapping Tax on Savings Interest on First £1,000 - 20th Mar 15
GDXJ / Gold Ratio - 20th Mar 15
What the “Yellen Effect” Ultimately Means for Crude Oil - 20th Mar 15
Sharp Fall In USD Index And Its Implications - 20th Mar 15
UK Solar Eclipse - End Time Sign, Judgement Day, Doomsday! - 19th Mar 15
How Many Shale Oil Plays Make Money At $37 Per Barrel? - 19th Mar 15
Gold Price Rises 2.1% – Fed Signals Loose Monetary Policies to Continue - 19th Mar 15
The Hottest Investment Opportunities in Tech Stocks Sector Right Now - 19th Mar 15
China's Deflationary Economic Bust and Beyond: Anne Stevenson-Yang Presentation - 19th Mar 15
T-Mobile CEO: "Sprint couldn't give away service...their network is completely dead" - 19th Mar 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Economy Still on Life Support

Japan Earthquake: Impact on Crude Oil, Fuel and Nuclear Power

Commodities / Crude Oil Mar 13, 2011 - 02:49 PM GMT

By: Dian_L_Chu

Commodities

Best Financial Markets Analysis ArticleA 9.0-magnitude earthquake rocked Japan on Friday March 11, prompting a 30-foot tsunami slamming the country's northeast coast. Media reported that one major oil refinery was caught fire while nearly a dozen nuclear plants were shut down leaving Millions of buildings around Tokyo without power.




Crude oil saw a pullback breaking the recent uptrend from the Libya and Middle East unrest.  Reuters reported that there were six refineries that account for 31% of Japan's output shut down after the quake and it was unclear when they would reopen.  Some media reports suggested the crude oil price drop is largely due to expectation that these refinery shutdowns could mean less imports of oil.

Earthquake or Rollover?

So, not surprisingly, I received an email asking whether the drop of crude oil is related to Japan’s devastating earthquake, or more the result of the mass rollover from United States Oil (USO) and the triple expiration as discussed in my previous post.

While there’s not one easy answer, a good place to start is to review some oil barrel statistics of Japan.

Japan Imports = 1.6% of World Demand

Based on the U.S. EIA data, Japan imported 4.7 million barrels a day (bpd) in 2009, with total oil refining capacity of 4.6 million bpd at 29 facilities as of January 2010. According to Reuters, the six refineries that are shut down have a total capacity of 1.40 million barrels per day (bpd).  That's about 1.6% of the 89.3 million bbl/d global 2011 product demand forecast by the International Energy Agency (IEA).

While Japan is the second-largest net importer of oil in the world after the United States in 2009, the  estimated import disruptions due to the earthquake does not appear significant enough to sway world’s crude oil market. 

China Trade Deficit - Major Catalyst

From various indications, the drop of crude price after Japan's earthquake could be partly attributed to the  knee-jerking reaction to a devastating natural disaster, some risk-off profit taking, USO starting its rollover on March 8, and the fizzled “Day of Rage” protest in Saudi Arabia.

However, the major catalyst for the downward pressure on crude oil before and after the Japan earthquake was the surprise trade deficit number--$7.3 billion, the largest in 7 years--coming out of China signaling an possible economic slowdown.

Japan to Increase Energy Imports after the quake

On the other hand, since about 25% of Japan’s electricity is coming from nuclear, the resulted power shortage due to closures of a dozen nuclear reactors after the quake suggests Japan will likely need to increase its imports of petroleum products and other energy sources (See Chart). 


The country’s power generation relies mostly on coal and natural gas, which means there will be an increase in imports of diesel (to power generators), and other petroleum products (since part of domestic production is offline), along with natural gas/LNG, and coal, just to keep the the entire nation going in the aftermath.

Fuel Prices Could Spike

The oil import disruption at Japan is unlikely to wrangle an upward momentum out of crude oil.  However, the Japanese refinery shutdown happens to coincide with planned shutdowns of crude units led by China and Japan that will cut 2.12 million barrels of output a day, or 6.8% of the region's total, in the April-June quarter, according to Reuters

Moreover, the second quarter is the typical refinery turnaround season with a substantial amount of crude processing capacity offline.  As such, there could be a tightening of the global petroleum products market, and spikes in the prices of petroleum products including gasoil (diesel), gasoline, along with LNG and coal prices.  This will likely benefit other Asian refiners in South Korea, Taiwan and China and oil majors such as Shell (RDS) with refineries in the region.

Meanwhile, construction, engineering and industrial material and equipment companies should also benefit from the massive rebuilding effort in Japan.  And some analysts also see a technology product price spike and supply crunch since Japan is a major high tech center of the world that could impact earnings in the tech sector. 

More Pressure from Triple Expiration

Now, turning back to the crude market in the week ahead, escalating call option trades (see chart)—the highest since July 2009--suggest the major rollover action is yet to occur.

Since there's not a real physical supply shortage, and  Cushing is brimming with crude unable to take delivery, more downside could be expected in the April crude contract from March 15 to March 22 with the triple expiration on ICE and NYMEX, which would further pressure both WTI and Brent.

From a technical perspective, $95 seems a solid target for the WTI, and Brent could come down to $109 or $108 range.


Japan Nuclear Meltdown Crisis

Besides crude oil, I think the biggest story out of this international disaster for the energy sector is the near materialization of the greatest obstacle and fear of the nuclear power – a possible nuclear reactor meltdown.

As of this writing, Japan is still struggling to contain the situation, and has resorted to using salt water to cool two reactors at Fukushima Plant. The reactors were damaged by the earthquakes, and could be at risk of meltdowns and spreading radiation.

U.S. Nuclear Power - 3 Decades of Void 

The U.S. has 104 nuclear reactors producing 799 billion kWh in 2009, or over 20% of total electrical output, according to World Nuclear Association. Although the US is the world's largest producer of nuclear power, accounting for more than 30% of worldwide nuclear generation of electricity; very few new reactors were built in the past 30 years after the Three-Mile incident in 1979.

However, despite big obstacles like cheap natural gas, high project costs and the Great Recession sapping demand in recent years, nuclear power was staging a comeback when President Obama's 2012 budget proposed $36 billion in loan guarantees to build nuclear power plants. The industry is expecting 4-6 new units to come on line by 2018, a result of 16 license applications to build 24 new nuclear reactors made since mid-2007.

Fukushima - The Deepwater Horizon of Nuclear Power

Now, the little progress the U.S. nuclear power sector has made in the past three decades could see a major setback, if not completely decimated, by the worst nuclear accident in Japan’s history.  There will likely be a more regulatory scrutiny, and a seismic shift in the global energy mix where more resources will be pouring into natural gas, clean coal and renewable, instead of nuclear.

In a way, Fukushina is the Deepwater Horizon of the nuclear power sector, and it fair to say it might take another 20 years of zero incident to get nuclear power back into the energy fold. 

Nuke Write-off?

On that note, future investments in nuclear power could be even harder to come by, and companies like NRG Energy (NRG) and Southern Company (SO) may need to scrap or write off their planned nuclear power projects, which could impact their forward earnings, and stock valuation.

Different Impact on Different Sectors

While the world is still in shock watching this tragic disaster still unfolding on TV, different sectors will likely experience different impacts from this unprecedented event.

In this case, it is most likely a non-event for the crude oil, and the nuclear power basically has met its Deepwater Horizon.  Likewise, other Asian refiners and companies specializing in infrastructure building could get an unexpected boost in their business, while consumers would likely feel the pinch in the form of higher fuel and technology product prices.

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at http://econforecast.blogspot.com/.

© 2011 Copyright Dian L. Chu - 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.


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014