While not wanting to be in any way disrespectful to all the human tragedy in Japan, we will try in this EMR to give an instant assessment on the energy market implications, which are likely to be substantial both in the short and long term. The market has been bearish on crude and largely neutral on products so far, with ICE Brent losing $4 per barrel since Thursday's close. However, we would tend to be bullish oil and more so natural gas, as long as a massive nuclear calamity is avoided. To assess the likelihood for the latter is a tricky task with statements diverging widely, but the recent explosion at another Fukushima Daiichi reactor (I/3) does not bode well. At any rate, the quality of information available about the ongoing issues with three reactors is disappointing, with the fact that the IAEA is headed by a Japanese seemingly of no use in this respect.
Taking in the economic repercussions first, we see two important supporting factors. In the short term, a massive loss of production stemming from destruction and company shutdowns in the aftermath (Toyota, Sony, Toshiba) will open a window of opportunity for suppliers from other countries. Meanwhile, the Japanese economy itself will see a massive reconstruction effort supporting the economy after the immediate slump. In its biggest ever single measure, the Bank of Japan has already injected about $86 billion into the system. The Nikkei lost 6.2% in today's trading session. 23.5% of ethylene production capacity is shut, with a similar share of the petchem downstream sector affected (Platts).
Concerning the oil market impact, too much focus might have been put so far on the shutdown of 1.4 million b/d or 31% of Japanese refining capacity (Platts) and the resulting loss of crude demand. However, the sector had been running at unseasonably high levels before the quake and tsunami struck, with about 0.4 million b/d of gasoline, jet and diesel having been exported to strong regional markets. As domestic oil companies are already inquiring about product imports, refiners within the region and even as far as into the Atlantic Basin will have to ramp up throughput. The likely positive impact on the US and European market stems from the stringent product specifications in Japan, which regionally only South Korea and partly Singapore can meet (the government might opt for a relaxation). While some domestic demand will be lost in the coming weeks, there is some upside for diesel from generators and reconstruction efforts, massive additional demand can be expected for 0.3% LSFO and direct-burning crude. Based on historical spikes in times of power shortages, we see an upside potential of up to 0.5 million b/d, split roughly equally between fuel oil and crude. Heavy sweet crude differentials will spike due to the lack of regional supplies, while fuel oil and middle distillate cracks should also receive support.
Longer-term implications are clearly bullish for hydrocarbons. Japan's nuclear power generation will be partly off for months or years. LNG imports have already been redirected from South Korea and increased from Russia (Sakhalin). The longer-term future of the nuclear energy worldwide will be discussed once again. After the 2008 oil price spike appeared to revive the nuclear outlook, we noted some disillusionment already before the current crisis. On Germany's TV channels at least half of the coverage on the current issue has been exclusively on the prolongation of the life-spans of domestic nuclear plants decided by the current government, accompanied by protests in many major cities. Accordingly, the future is increasingly likely to see a sea-change to natural gas burning, which would questions how long cheap gas prices will be sustainable. But even oil as an expensive but reliable, flexible and secure back-up generation fuel might receive some support.
Finally two quick comments on other developments of relevance. Gaddafi-loyal troops are recouping city by city in Libya thanks to massive air strikes, with Benghazi remaining basically the only stronghold of the revolution forces. As international attention is distracted by the Japanese tragedy it looks increasingly unlikely that a no-fly zone will be installed in time, even though the Arab League is calling for such a move. Meanwhile, US gasoline prices have reached again $4 per gallon, making it even more interesting to see how politicians will bring back Libyan barrels into the market in the event that Gaddafi stays in power (who will buy it).