The global energy market consequences of the devastating earthquake that hit Japan on March 11, 2011 are already starting to be felt, but so far, impacts have been more in spot LNG markets than in oil markets.  That’s because the increased demand for oil to burn for electricity generation will be offset by generally lower oil demand. An exit from the market of Japanese petrochemical demand for naphtha is already being felt. Analysts are expecting Japanese oil demand to be down 350,000 b/d to 400,000 b/d in March and to average about 250,000 b/d net declines for the third quarter 2011. The prolonged loss of 617,000 b/d of Japanese refining capacity (about 14 percent of Japan’s 4.5 million b/d capacity) was initially offset by inventory drawdowns and will be eased through lower Japanese oil demand. Eventually, Japan will need to enter the products market to replenish stocks.

These market ramifications of the Japanese earthquake will be discussed today at a luncheon meeting, which will be webcast from noon until 1:30pm today. 

Nuclear operator TEPCO is reported to be in the market to add 10 natural gas turbines at existing thermal power plant sites in Japan. The expected increases in natural gas demand for Japan have already taken much of the surplus off global LNG markets. Indonesia cancelled its spring tender for five spot cargoes of spot LNG and instead is sending this supply to Japan. Russia has also announced that it will increase its LNG sales to Japan, while Qatar has redirected two cargoes back from the United States to Asia. As more countries investigate whether they need to shut down nuclear plants for safety inspections, the increase in LNG demand could extend beyond Japan. LNG prices rose by over $1.50 per mmbtu in Asia in the immediate aftermath of the earthquake and are now rising in Europe.

In 2002, when TEPCO was forced to shut down five nuclear plants for extended safety checks, the company similarly increases its purchases of LNG. At the time, TEPCO confirmed that it would need an extra 130,000 tons a month of LNG to replace lost output from its closed nuclear power facilities. As TEPCO shutdowns continued into the autumn of 2002, the company’s spot LNG purchases impacted natural gas prices around the world, including adding pressure to U.S. natural gas prices at Henry Hub. But the 2002 TEPCO situation coincided with a prolonged disruption of supplies from Indonesia, thereby enhancing its market impact. In early 2003, the TEPCO nuclear shutdowns prompted an increase in oil use in Japan year on year of 344,000 b/d.

Photo by asifthebes.