Refinery Margins Poised to Surge as Power Capacity Falls

Sunday, 13 Mar 2011 01:21 PM

 

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Japan’s biggest earthquake, which cut at least 9 percent of power capacity, may boost oil-refining profits in Asia as the world’s third-largest economy seeks to replace lost nuclear output.

Fuel oil’s discount to benchmark Dubai crude, a measure of the cost of turning oil into the refined product, shrank 12 percent in Singapore on Friday, the most in two weeks, according to data compiled by Bloomberg. The 8.9-magnitude temblor shut 11 nuclear reactors and 21 thermal power plants.

Asian fuel-oil premiums doubled in July 2007 after an earthquake shut Japan’s Kashiwazaki-Kariwa nuclear plant, the world’s biggest, forcing Tokyo Electric Power Co. to consume 59 percent more fuel oil. Seven times more nuclear power capacity was shuttered by last week’s quake, according to Bloomberg calculations. Fuel-oil prices also surged in 2002 to 2003 after Tokyo Electric was forced to close all 17 of its reactors because it falsified safety documents.

“Japan has had a series of problems with nuclear power plants and this is many more times serious,” said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. “My gut feeling is that it will be bullish for oil because they will have to make up for nuclear power. It’s going to have a positive effect on fuel oil.”

Death Toll

The death toll from the earthquake and ensuing tsunami that engulfed towns on the northern coast may top 10,000, according to local media. More than 350,000 people are in emergency shelters while the country grapples to contain its worst nuclear accident after an explosion in a reactor north of the capital.

Tokyo is already threatened by blackouts as power supplies are cut and the city will experience shortages for several weeks, Tokyo Electric said. Areas will have no electricity for three hours at a time, the company said.

While Japanese utilities typically rely more on nuclear power, natural gas and coal for electricity generation because they are cheaper, they make up for shortfalls by burning more oil in power stations. Japan imports most of its low-sulfur fuel oil from Indonesia and Malaysia, according to Edinburgh-based Wood Mackenzie Consultants Ltd.

Middle Distillates

Demand may also rise for middle-distillate fuels such as diesel, as factories use their own generators to provide electricity, according to Akira Kamiyama, an energy derivatives trader at Mitsui & Co. in Tokyo. Diesel’s premium to Dubai crude, or the crack spread, rose for the first time in four days in Singapore following the quake. The difference was $19.77 a barrel Friday, according to PVM Oil Associates, a broker.

“This is a super bullish factor for the Asian middle distillates and fuel-oil market,” Kamiyama said. “Factories which have their own generating facilities will begin to buy diesel, while utilities will start purchasing fuel oil.”

Tokyo Electric is battling to prevent a meltdown of two reactors at the Fukushima Dai-Ichi plant, after an explosion in one of the units. The permanent shutdown of the plant would have a “tremendously big impact on the fuel market,” Kamiyama said.

The quake has shut or disrupted supplies from seven of Japan’s oil refineries, accounting for more than a third of the nation’s oil processing capacity, or 1.6 million barrels of crude a day. Refinery utilization may fall to about 65 percent following the earthquake, from 88 percent beforehand, Wood Mackenzie said in a report on its website.

Diesel Exports

Even as that reduces the need to import refinery and petrochemical feedstocks such as crude and liquefied petroleum gas, it will also cut the volume of diesel available for export, further boosting regional prices, the energy consultant said.

JX Nippon Oil & Energy Corp., Japan’s largest refiner, shut plants in Sendai, Kashima and Negishi. Cosmo Oil Co.’s facility in Chiba, outside Tokyo, was on fire, while Showa Shell Sekiyu KK said it halted shipments at refineries in Keihin and Yokkaichi. TonenGeneral Sekiyu K.K., Exxon Mobil Corp.’s Japanese refining unit, shut all major units at its Kawasaki refinery near Tokyo.

Japan consumed an average 430,000 barrels a day of fuel oil in December 2010, according to International Energy Agency estimates. Diesel consumption was 450,000 barrels a day.

Gasoil Exporter

“Japan is one of the most active gasoil exporters,” said Kamiyama. “All the other Asian refiners, such as South Korea, Taiwan and China, are likely to benefit from the loss of refining capacities in Japan.”

Fuel oil’s discount to Dubai shrank to $8.08 a barrel. Benchmark 180-centistoke fuel-oil cargoes cost $649.50 a ton in Singapore. Prices rose 0.2 percent last week compared with a 1.3 percent decline in Dubai crude. Gasoil with 0.5 percent sulfur cost $129.30, down 1.5 percent from a week before.

Japan is the world’s third-largest oil consumer after the U.S. and China, using more than 4 million barrels of crude a day in 2010, according to the International Energy Agency. While it imported 790,000 barrels a day more oil products than it exported last year, overseas diesel sales exceeded purchases by 150,000 barrels a day, according to Wood Mackenzie estimates.

Crude prices could drop because of the decline in refinery utilization, Kamiyama said. A reduction in the country’s economic activity as a result of the earthquake may also depress the need for crude, according to Mitsubishi’s Nunan.

Oil futures on the New York Mercantile Exchange dropped 3 percent last week to $101.16 a barrel. Prices rose to the highest in 29 months on March 7 amid production cuts in Libya.

© Copyright 2014 Bloomberg News. All rights reserved.

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