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

March 13, 2011

EconMatters

6 followers
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.

Japan+Quake.png

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).

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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 its 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

So, 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.

Crude+Option.png

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 a completel decimation, by the worst nuclear accident in Japan’s history. There will likely be a more major 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 impact 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.

About the author:

EconMatters
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.7/5 (6 votes)

Comments

AlbertaSunwapta
AlbertaSunwapta - 3 years ago
Anyone see Zacks piece today? Excerpt below... :-)

It will sure hurt the industry but blame should be placed on the cooling system and site selection engineers not the nuclear engineers. Are prices over-reacting now?

Note: I added to my IBC Advanced Alloys position as it 'might' be a beneficiary.

http://www.prnewswire.com/news-releases/zacks-investment-ideas-feature-highlights-cameco-shaw-group-energy-solutions-and-uranium-resources-117930744.html

Zacks Investment Ideas Feature Highlights: Cameco, Shaw Group, Energy Solutions and Uranium Resources

Blast Off with Nuclear Stocks

"CHICAGO, March 14, 2011 /PRNewswire/ -- Today, Zacks Investment Ideas feature highlights

Yes, it is very expensive to build a nuclear plant, but there are many other market forces and trends supporting its development.

At the top, nuclear energy produces no harmful emissions. That in and of itself is a huge deal that blows its competitors out of the water.

Similarly, nuclear energy produces very little waste, much less waste than burning fossil fuels. And the waste that is created from nuclear is contained, treated and stored to shield it from the environment and human beings..."





"...And finally, nuclear is safe..."
AlbertaSunwapta
AlbertaSunwapta - 3 years ago
The uranium stocks are starting to catch my attention as I can't see China backing off on its development plans anytime soon (so I still see IBC as a potential beneficiary).

For those interested - some other news on IBC Advanced Alloys...

http://www.reuters.com/finance/stocks/keyDevelopments?rpc=66&symbol=IB.V×tamp=20110315120300

AlbertaSunwapta
AlbertaSunwapta - 3 years ago
Just to flog this horse one more time - here's an old article on uranium and beryllium. I saw it as a 'picks and shovel' approach to investing in future nuclear development.

excerpts:

Uranium and Beryllium Stock Picks from James Passin

January 30, 2008

http://seekingalpha.com/article/62231-uranium-and-beryllium-stock-picks-from-james-passin

We sat down recently with James Passin of Firebird Management LLC. Firebird manages $3.5 billion in eight funds dedicated to equity investment in emerging markets, with an emphasis on the former Soviet Union and emerging Eastern Europe, and exotic sectors worldwide. Excerpts from the interview:


PASSIN: I am finding a lot of opportunities in those companies involved in nuclear power plant construction and the nuclear fuel cycle. It's as exciting to me now as the uranium exploration and production story was five years ago.

The materials needed to build these nuclear reactors are going to be very important, and one of the most important materials is beryllium...

Another interesting beryllium stock is International Beryllium Corporation (TSX.V:IB)... I think that IBC stands to play a unique role in consolidating the beryllium industry.


I should also mention Vangold Resources (TSX.V:VAN),...including a strategic 26 percent stake in International Beryllium Corp. I think the value of the stake is going to be worth multiples of Vangold’s current market capitalization..."

AlbertaSunwapta
AlbertaSunwapta - 2 years ago
Since my above comments received favourable ratings I have to say that IBC hasn't been my best pick. While it rode out the Japan crisis and has even had some subsequent double digit returns, dilution has raised it's ugly head, of course, just when things are looking up for the current owners.

Also, is this a value investment? No. I rank it more like an investment in gold - maybe one rung above gold. Just a speculation on a possible need for increased nuclear power in the future.

For what it's worth here's an update that may be of interest to some with a very long time horizon.


IBC Vice President of Nuclear Fuels Jim Malone Appointed Chairman of World Nuclear Association Fuels Working Group

http://www.marketwatch.com/story/ibc-vice-president-of-nuclear-fuels-jim-malone-appointed-chairman-of-world-nuclear-association-fuels-working-group-2011-09-12-93290?reflink=MW_news_stmp

excerpt:

"The Fuel Technology Working Group is specifically focused on investigating and assessing the viability of commercializing a number of fuel-type variants, including high thermal conductivity beryllium oxide fuel such as being developed by IBC with Purdue and Texas A&M universities. The first meeting of the Fuel Technology Working Group will take place on September 12, 2011 in London, England at the Annual World Nuclear Association Symposium.

Mr. Malone's appointment reaffirms his position as an acknowledged nuclear industry leader and nuclear fuel expert with more than 40 years of senior experience in the downstream business. Most recently he was Vice President, Nuclear Fuels at Exelon Corp.,…"

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