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What factors may influence Japanese Oil demand for the rest of 2013

10 Jun

“Although this (oil consumption) is extremely high, the situation is normalising with crude oil consumption for generation down 27% y/y while fuel oil demand for the same purpose has decreased 22% y/y. We expect this downward trend in crude oil and fuel oil usage to continue over H2 13,” Barclays estimated.

The Fukushima nuclear power plant crisis did take at least 48 of the 50 nuclear reactors in Japan offline in a stage-by-stage manner resulting in heavy reliance on crude oil and its distillates for power generation. But, so far into this year, Japanese demand for oil has “normalised” as strong numbers have dissolved into thin air. This is primarily due to the following set of reasons:

–Decreased industrial demand: Q1 Industrial Production average of Japan was 5.9% lower y/y which made a dent on the electricity generation and consumption figures.

–Fall in heating demand: Higher temperatures from late March to early April prevented a surge in heating demand.

–Nuclear power capacity making a comeback: The share of nuclear power in Japan’s energy mix has increased from 2% to 5.3%.

–High base usage and limited capacity expansion for oil-powered facilities.

Weird stats

It is opportune at this moment to recall some statistics in this regard:

–As mentioned earlier there had been 50 reactors in Japan functioning before the nuclear disaster.

–These reactors generated about 22.62 mn MWh at the end of 2010. The actual capacity of the reactors was double the number!

–As the plants were shut down one-by-one in Japan, the power generation figures dropped to 1 million MWh, a 96% drop compared to 22.62 million MWh!

–Recent days have seen the generation climbing to 1.76 million MWh

–April saw Japan burning 220% additional crude oil and 94% in extra fuel oil compared to pre-Fukushima levels.

crude oil intraday tips

“It is unclear how many reactors will be coming back online or how many will have to be decommissioned permanently based on the findings of the regulation authority,” Barclays said in the report on Japanese oil demand. Hydro and thermal sources are now sharing the power generation burden of Japan these days.

“Although this (oil consumption) is extremely high, the situation is normalising with crude oil consumption for generation down 27% y/y while fuel oil demand for the same purpose has decreased 22% y/y. We expect this downward trend in crude oil and fuel oil usage to continue over H2 13,” Barclays estimated.

So, what will influence one of the biggest economies in the planet in the second half of the year as far as crude oil demand is concerned?

Influencing negatives

Weakening of Japanese Yen: As Japanese Yen has weakened to 100 for a Dollar, compared to 80 last year, Japan’s crude import basket has turned out to be very expensive. For instance, March 2013 had seen the basket becoming most expensive since October 2008 breaking the 10500 mark and reaching 10875 for the month. The highest this basket has come to rule was at 14627 in August 2008. (But that was primarily due to a rally in underlying crude oil prices.)

Needless to say, importers of Japanese crude and fuel oils have begun to feel the heat of purchase. This should be read in the context of a possibility of range-bound trade in crude oil in the days to come.

Meanwhile forex market strategists at Barclays, “expect USD/JPY to rebound to 103 over the next 3-6 months because they expect it to be a bellwether if the government’s policy for targeting higher inflation is credible. Additionally, they expect the US economy to gain strength in H2, 13 and support market expectations of Fed tapering, leading to broad USD strength.”

Not good news for Yen bulls as well as crude oil importers in Japan.

Potential nuclear renaissance: It is clear that liberal democrats who are in power in Japan, especially, the Japanese PM Shinzo Abe want to push the start button in nuclear reactors, as and when the regulatory authorities give a green signal. The measure is deemed important by Abe and his team as only then would his party be able to carry out its economic agenda and secure their long term interests.

But the ride may not be smooth. On June 2, thousands of protesters took to streets in Tokyo in defiance of the Abe’s plan. They have alreadyc collected almost 8 million signatures against it. Meanwhile a nuclear plant in Tsuruga was found to be sitting on a fault line and thereby susceptible to earth quakes making its chance of getting approved almost nil.

“The authorities will continue to review plants and applications for potential restarts, though Abe’s push for imminent wide-scale nuclear power seems highly unlikely,” Barclays said in the report.

Influencing positives

Diesel cars and Abenomics: Diesel cars are becoming much more popular in Japan as the they increasingly turn out to be eco-friendly and subsidies for clean diesels kick in. No wonder Japanese gasoil demand has jumped 2.5% year-to-date.

“Last year, the higher call on fuel oil and crude for power generation trumped the negligible flat growth in gasoline, kerosene and gasoil. This year, we expect these refined products, particularly gasoil, to produce a slightly more measurable rate of growth,” Barclays said in the report.

However, domestic sales of new cars in Japan as well as trucks and buses have been falling by 7.3% y/y in May even as the drop may not be as steep as had been expected.

Meanwhile, with Abenomics under work, Japanese real GDP growth is expected to see annualised gains of 3.5%-3.7% over the four quarters starting second quarter in 2013 as Yen weakens further and fiscal spending climbs along with wealth effect taking routes on equity rallies.

All these factors can positively contribute to oil demand growth in Japan.

SPR sales: In a bid to replace heavier grades of crude oil with lighter ones–given the improved appetite for latter–Japan’s METI sold about 4.4 mb of crude from the country’s Strategic Petroleum Reserves.

The ministry is estimating to buy back 6.29 mb of light grades, saying they are waiting for the right moment. If carried out over a two-month span, it would boost imports by an additional 104 thousand b/d.

“In our view, given further depreciation of the yen expected…we would not be surprised if they come into the market sooner rather than at the tail end of the year,” Barclays said.

Taking all of these factors into consideration, Barclays expects Japanese oil demand growth to come down by a marginal 0.03 mb/d or 0.63% in 2013.

Crude shoots up on weaker dollar, North Sea supply snags

4 Jun

Oil prices shot up on Monday after U.S. data sent the dollar plunging, while reports of supply snags in the North Sea pushed up prices even further.

A weaker greenback tends to make oil a nicely priced asset in dollar-denominated exchanges, especially in the eyes of investors holding other currencies.

On the New York Mercantile Exchange, light sweet crude futures for delivery in July traded up 1.58% at USD93.43 a barrel on Monday, off from a session high of USD93.68 and up from an earlier session low of USD91.29.

A falling dollar made oil a nice buy on Monday.

The Institute for Supply Management said earlier its manufacturing purchasing managers’ index for the U.S. fell to 49.0 in May from 50.7 in April.

Analysts were expecting an unchanged reading.

On the index, a reading above 50.0 indicates industry expansion, below indicates contraction.

The numbers sent oil gaining on sentiments that the Federal Reserve will keep stimulus tools in place that keep the greenback weaker to spur recovery.

Meanwhile in Europe, better-than-expected PMI data further weakened the dollar and sent oil gaining.

The eurozone’s manufacturing PMI improved to 48.3 from 47.8 in April indicating that the slump in the manufacturing sector is easing, according to London-based Markit Economics.

Germany’s manufacturing PMI was revised up to 49.4 in May, beating market calls for a 49.0 reading.

Reports of supply snags in the North Sea sent Brent futures soaring.

Platform operator Nexen reported earlier equipment failure will cut output in the Buzzard oilfield until later this week.

On the ICE Futures Exchange, Brent oil futures for July delivery were up 1.73% at USD102.13 a barrel, up USD8.70 from its U.S. counterpart.

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Three factors weighing on prompt month Crude Oil futures

18 May

Crude Oil refining margins remain lacklustre (weighed down by light product cracks in particular), with a few run cuts materialising in Europe. Refineries that have returned from maintenance are refraining from boosting utilisation rates, limiting the need to actively bid at the prompt.

—Asian refineries are at the height of their maintenance schedule, and with the prevailing compressed margins, Bank does not expect utilisation rates to surge as the maintenance season fades.

–A general reduction in non-OPEC shortfalls, with volumes from Sudan coming back, has helped relieve significant sources of stress in the supply system for now. However, other sources of geopolitical and technical challenges are emerging through the supply system.

The three factors mentioned above are weighing on the prompt month crude oil futures and should continue to do so, at least until the tail end of Q2; Barclays has noted in a report.

“At the prompt, we continue to see very few constructive elements across the demand-supply equation for crude oil. The OPEC basket price is also reflecting this weakness, briefly falling below the $100/bbl mark this week,” the bank report noted.

Overall, Barclays maintans its view that the short-term weakness in fundamentals is likely to fade as
the tail end of Q2 approaches.

On the demand side, the first indication to watch out for would be a recovery in petrochemicals in Asia.

However, such a pick-up is unlikely to be a straight line, in Barclays’ view. The naphtha market faces weight from oversupply and mild end-user consumption (in February and March, Chinese demand for the product fell by an average 3% y/y).

The supply side in Asia continues to be buoyed by incoming arbitrage volumes from Europe and the US on favourable east-west spreads. Around 1mt of heavy naphtha is expected to arrive in May for delivery in June (compared to typical flows of 0.6mt).

Compounding the weakness for naphtha cracks in the region, more supply is expected to come from Indian refiners as they boost exports as they emerge from maintenance season.

“The above factors will, in our view, be closely watched by other refineries in Asia as they emerge from maintenance, and a fair degree of tentativeness is likely to be exercised in boosting utilisation rates,” the Bank said.

“In our view, end-consumption for the olefins market (polyethylene, polypropylene, and styrenic resins) should pick up in June, buoyed by attractive prices and an improvement in manufacturing activity,” it added.

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