The Japanese earthquake on March 11 almost took the heat off oil prices that were fed by the continuing turmoil in Libya and some countries in the Middle East.
All other factors in the market are still there but they have taken a secondary role for the time being. Analysis for economic growth, oil supply and demand balances and price expectations that were made before the Japanese disaster are now uncertain and must be reviewed.
In any case no changes of substance with respect to supply and demand balances have been reported by either Opec or the International Energy Agency (IEA). The call on Opec crude oil in 2010 was around 29.3 million barrels a day and is expected to rise to 29.8 million bpd in 2011.
The initial impact of the crisis in Libya was a sharp rise in oil prices and the price of the Opec basket of crude oils which averaged $100.29 a barrel in February rose to $112.03 a barrel by March 7 only to fall down to $105.8 a barrel by March 16 in the aftermath of the Japan earthquake.
The immediate fear was that the destruction in Japan will reduce demand so much and therefore affect prices. This impression was soon found wrong and the prices moved in a narrow range such that the average price for the basket in March could be close to $110 a barrel. Prices have persistently continued their monthly increase since July 2010 when they were at $77.45 a barrel.
The loss of oil production from Libya due to the turmoil and war was soon countered by increasing production elsewhere. Even the special quality of Libyan oil and its suitability for European refiners appears to be managed by switching supplies of similar crudes.
The fact that refinery utilisation is low allowed the use of sour crude to generate the desired product slate. Therefore, the market seemed to have contained the problem of the loss of Libyan oil for now at least.
But the problems in other countries in the region such as Yemen, Bahrain, Syria and Jordan still worry the market though the exports from Yemen and Syria (300,000 bpd each) may be substituted from other countries if need be. The market worry is of course centred on the long-term impact of these events and not just on the lost volumes in the short run.
In Japan the crisis was so big that six refineries with a total capacity of 1.6 million bpd stopped operations. Two refineries were heavily damaged by fire and are likely to stay out of action for a long time. But the refining capacity was restored after the initial shock by increasing throughput in other refineries or by bringing back idle plants on stream.
The thought of diminishing oil demand in Japan because of the disaster was also quickly dismissed as the outlook now suggest that demand may in fact increase.
To substitute the lost nuclear power generation capacity of 12 gigawatts (GW), Japan has to rely on its spare oil-fired power stations that generate about 30 GW. Therefore fuel oil and direct crude consumption are likely to rise to counter any reduction in transportation fuels even though, Japan may try to use gas before turning to oil.
All in all, some analysts such as Petroleum Intelligence Weekly believe that Japanese oil demand in 2011 is likely to be reduced by 80,000 barrels a day in spite of the increase in oil use for power generation but other analyst, including Deutsche Bank, say that Japanese oil demand may actually increase by 130,000 barrels a day compared to forecast before the quake.
Although the Japanese crisis has so far cooled the rise in crude prices and appears to have made some balance with the Libyan crisis, the future may hold a different scenario especially if Japanese reconstruction starts in earnest and early.
The release of 66 million barrels of stocks in Japan may have also cooled the market though these stocks have to be rebuilt later.
Even if all those barrels of oil are used Japan would still hold stocks sufficient for 130 days of net imports, way above the IEA 90-day obligation.
While oil prices were also supported by the cold weather in winter, the market is now approaching the second quarter where oil demand is likely to be less than the first quarter by as much as one-and-a-half million bpd.
The market will also factor the economic situation in Portugal and the way the EU will tackle the problem.
These and other factors make watching the oil market interesting in the days to come.
- The writer is former head of Energy Studies Department at Opec Secretariat in Vienna.