OIL PRICES AND THE JAPANESE DISASTER: THE HERD GOT IT WRONG

By Andrew McKillop 21st Century Wire March 14, 2011 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. Analysis… 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. Where markets are concerned, there is a risk that Japan is under such stress that they can’t even get their oil ports and refineries functioning again before 10 + days, making Japan’s draw on world oil supply slower to return. But it’s unlikely. Still, since Saturday, TV news from Japan has been depicting plenty scenes of totally empty filling stations and 800-metre lines of cars searching for their next 10 litre fill per car from any remaining stations that still stock fuel. 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. COPYRIGHT ANDREW MCKILLOP  2011 - Andrew McKillop is guest writer and energy markets analyst for 21st Century Wire. He has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has extensive experience in energy policy, project administration, including the development and financing of alternate energy. - facebooktwittergoogle_plusredditpinterest