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

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By Dian L. Chu, EconMatters

A 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 majorly 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 is 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.

EconMatters, March 14, 2011 | Facebook Page | Post Alert | Kindle

 

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Mon, 03/14/2011 - 12:41 | 1050651 Zina
Zina's picture

If several nuclear plants in Japan will be disconected from the grid during the next months, they will have to produce electricity from natural gas and coal.

What the impact will be in the prices of natural gas and coal?

Mon, 03/14/2011 - 10:41 | 1050107 MrVincent
MrVincent's picture

China will move forward with its nuclear power plans. America will continue to burn fossil fuels for its power needs.

Who wins? You do the math!

 

Mon, 03/14/2011 - 05:25 | 1049448 luk427
Mon, 03/14/2011 - 10:51 | 1050140 chopper read
chopper read's picture

Coal fired electricity in West = legislative target, coal fired electricity in East = good investment. Any questions? ...remember David Rothschild campaigns against 'global warming'. Got hypocrisy?

Mon, 03/14/2011 - 05:20 | 1049444 hero HNL
hero HNL's picture

The reactor that exploded was made by GE. It's a PWR type of late-60's design.

 

hero

Mon, 03/14/2011 - 07:07 | 1049502 New_Meat
New_Meat's picture

HNL

"The reactor that exploded was made by GE. It's a PWR type of late-60's design."

sonny, that is an oh-fer-3.

Unit 3 was designed/built by Toshiba-san.  BWR-4.  Early '70s design

http://en.wikipedia.org/wiki/Fukushima_I_Nuclear_Power_Plant

Mon, 03/14/2011 - 05:18 | 1049443 hero HNL
hero HNL's picture

Nuclear reactors are out and factories are closing down accodring to NHK...Why would oil consumption & economic activity rise?????

 

Common sense will tell you the contrary.

 

hero

Mon, 03/14/2011 - 05:15 | 1049441 tim73
tim73's picture

Stupid comparison to Deepwater Horizon. That rig was state-of-the-art, one of the industry flagships. These Japanese reactors are 40 year old, quite obsolete reactors, about the size of large gym each.

Mon, 03/14/2011 - 03:19 | 1049345 Young
Young's picture

Drop in crude? What drop? People read too much into the logical lies of the mainstream media outlets. God damnit, haven't you people heard of a pullback - just buy it and shut up!

Mon, 03/14/2011 - 03:13 | 1049338 dondonsurvelo
dondonsurvelo's picture

China, India, the Middle East and other emerging markets are not going to pull the plug on the projects they are working on.  They will take this experience and build on it to make sure they are prepared.  Imagine if Japan had a couple of nuclear powered aircraft carriers that they could have put offshore to power up the two plants that went down.  Imagine if the forty years of little or no nuclear research because of the anti nuke campaign after 3 Mile Island, had not transpired.  The 30 to 40 year old reactors would probably been replaced with safer more reliable models. Right now the Chinese are going to construct pebble bed reactors that would not have meltdowns like the dinosaur reactors in Japan. 

Nuclear power is a risk we are all willing to take in order to live our modern lives.  If you are not willing to accept the risk then disconnect from the grid.  Some can and do but most of us want the comfort that comes with the flick of a switch.

Mon, 03/14/2011 - 08:00 | 1049616 overmedicatedun...
overmedicatedundersexed's picture

this will kill the electric car,.,.the newest large user of electric power grid, which cannot use coal, oil, nat gas or nuke stations to fill the need for more power.

seems like buggy whips and buggy makers are going into a boom..ride em cowboys.

Sun, 03/13/2011 - 22:48 | 1048387 strannick
strannick's picture

Nuclear Powers Deepwater Horizon? What Deepwater Horizon? Obama had them back drilling in months.

Sun, 03/13/2011 - 22:15 | 1048169 irieblue
irieblue's picture

I heard some interesting insight by a Livermore Nuclear physicist on the radio today. The meltdown was preventable. This nuclear plant was on an island, and it is as if the Japanese did not consider the sheer level of the Tsunami. Esentially the water killed all the onsite power. Had the Japanese military Air lifted in the ontainer sized portable power units, this meltdown could have been avoided. Esentially the site had no power because of all the water damage. Seems like a rookie mistake having a nuclear power plant on an island that could be completely flooded by a Tsunami.

Sun, 03/13/2011 - 21:54 | 1048097 ThisIsBob
ThisIsBob's picture

There is too  much electricity anyway and it has made us spoiled and soft.

Jeezus, look what Leonardo did by candlelight.

Sun, 03/13/2011 - 19:20 | 1047531 malikai
malikai's picture

I expect this event to be spun as a great triumph of nuclear power. All this went wrong and there was no chernobyl(remember, public perception). The focus once the reactors are all stable will be on the rest of the damage to Japan. This issue will be forgotten in lieu of the Japanese reconstruction, then the iPad2. 

Mon, 03/14/2011 - 01:06 | 1049078 QQQBall
QQQBall's picture

It would be easier to spin, if the explosions hadn't been televised worldwide.

Mon, 03/14/2011 - 07:50 | 1049585 Matte_Black
Matte_Black's picture

Don't look now, but NHK just announced that Fukushima #2 now has a failed cooling system, and that sea water is being pumped in.

Mon, 03/14/2011 - 04:26 | 1049405 BigDuke6
BigDuke6's picture

i see the rothschild's hand in all of this.

but also the media can video the reactor easier than a rig far out in the gulf

Sun, 03/13/2011 - 20:14 | 1047649 SWRichmond
SWRichmond's picture

All this went wrong and there was no chernobyl

I know just what you mean!  Oh, dammit!  It would have been much better had another Chernobyl occurred, right?  Then the oil companies' monopoly on global energy would have been further cemented into place, and we all could have been assured of remaining reliant on fighting global wars over oil for the next generation or so at least!

Sun, 03/13/2011 - 18:52 | 1047512 Fred Hayek
Fred Hayek's picture

I'd like to believe that the problems at fukushima would get Obama and Chu off their puzzling, complete inertia in regard to liquid fluoride thorium reactors but they make too much sense.  Thorium is relatively harmless.  You can hold a lump of it in your hand.  The U.S. has, literally, tons of the stuff as a byproduct of all kinds of mining operations.  And these reactors can be set up such that if power to operate is cut off, the thing just harmlessly stops.  They ran one for something like 5 years in the late 60's but decided not to go with LFTR's because you can't make material for nuclear weapons from them.

In short, there's no argument really against them.  But Obama and Chu seem to prefer pretentious yet actually quite stupid positions on most issues so they've shown zero interest so far.

Sun, 03/13/2011 - 18:24 | 1047411 blazen
blazen's picture

And regarding natural gas (Henry Hub NAT GAS): what happened to its price? It's close to its historical lows, even with devalued $. It's become insanely cheap as energy compared to oil yet prices are extremely low. Let's forget about Japan for a moment and focus on global demand: price ratio nat gas/crude or heating oil is very low. Any obvious explanation for that ?

Sun, 03/13/2011 - 18:19 | 1047394 blazen
blazen's picture

Is the information regarding BRENT still valid ? APR contract expiry is on March 16th (see ICE website). With rollover happening (in general) 8 days before expiry, should one still care about ETFs and HFs influencing the price? Same holds for options if I got it correctly, in this case: https://www.theice.com/productguide/ProductDetails.shtml?specId=218

 

I didn't check anything about WTI, however.

 

Sun, 03/13/2011 - 18:19 | 1047389 Saxxon
Saxxon's picture

Solar and especially natural gas will see a resurgence in investing interest.

Sun, 03/13/2011 - 17:56 | 1047320 romanko
romanko's picture

whatever.

did the world stop using or drilling for oil after the gulf spill?

 

 

Sun, 03/13/2011 - 20:17 | 1047653 Paul E. Math
Paul E. Math's picture

I agree, romanko.  Where are all the new reactors being built right now?  Answer: China and India.  This incident will have no impact on their reactor projects or their demand for uranium.

I also think of the flip-side to this event - while this is scary right now, if Japan reactors experience a 9.0 earthquake and DON'T produce major radiation then public confidence in this cleanest, cheapest and safest form of energy will actually skyrocket.

Disclosure: long CCJ

Sun, 03/13/2011 - 23:37 | 1048700 jeff montanye
jeff montanye's picture

it might skyrocket if the public were also long ccj.

Sun, 03/13/2011 - 17:53 | 1047312 joetunn
joetunn's picture

The impact on the oil price will be determined by the upcoming discussion about the safety of atomic energy and the outcome is pretty simple to guess, so expect oil prices to go up, as energy out of solar and wind are yet not efficient.

Mon, 03/14/2011 - 06:59 | 1049492 New_Meat
New_Meat's picture

"... yet not efficient."

let us know when.

Sun, 03/13/2011 - 17:47 | 1047288 Azwethinkweiz
Azwethinkweiz's picture

So much for my latest purchase of DNN...I have the worst luck in the world at picking stocks.

Mon, 03/14/2011 - 00:22 | 1048910 Maos Dog
Maos Dog's picture

Not really... I am (was) long jap small and mid caps

Not like I really care about losing money in this situation

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