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Andrew McKillop :Oil prices and
the japanese disaster: the herd got it wrong


 

Friday 11th trading on the US Nymex and to lower extent on the London ICE was driven by a quick sentiment-driven response to breaking news of the Japanese disaster.

Refineries were on fire, ports were closed and cars, buses and trucks were floating like jetsam, in the raging tsunami. Oil traders surmised that Japan's oil demand and its import draw on world supply were both set to fall and prices were sharply marked down through the day.

FRIDAY TRADERS MADE A WRONG WAY BET – BUY ON THE DIP

We can ask how the Herd got it wrong, and the answer is they made a mistake in all kinds of ways.

Even in the short term, probably within at most a week, Japan's oil demand and therefore its call on world export supply will be up.

The reasons are multiple.

Japan is faced by a major catastrophe. Heavy transport, cranes and earthmoving equipment, diggers and dozers will be moving into action fast. Some of these machines use a couple of barrels per hour, and both helicopter and airplane movements will be up in the ongoing rescue effort. Electric power
plants have been hit, and the energy shortfall will be made up in part with oil-powered gensets. Worried Japanese will be driving where they can, when they can, and filling up on oil at every station they can find with remaining supplies. While the weather stays unusually cold in Japan, oil heating demand will also be up.

NUCLEAR POWER

The next reason that will make oil prices bounce, and can speed Japan's oil demand recovery is the massive damage to nuclear power plants and the image of nuclear power in Japan.

Both on fundamentals and on sentiment, when nuclear power takes a hit oil will gain. We do not yet exactly know how many nuclear plants are seriously damaged, and could explode like the 1986 Chernobyl disaster, but every reactor that is down will lever up oil demand.

Sentiment will translate that to an outsized rise for oil futures, with the rise getting bigger every day the Japanese government has to sidestep and parry questions on their ageing nuclear plants and how well, or how badly they resist earthquakes and tsunami.

Worldwide concern about nuclear power's safety and real ability to deliver cheap electricity, and its real ability to save oil will grow, as the Japanese disaster deepens and more information trickles out.

Whenever more balanced truthful information about nuclear power emerges, oil will always gain.

COPYRIGHT ANDREW MCKILLOP 2011




Andrew McKillop
is a Founder member, Asian Chapter, Internatl Assocn of Energy Economists and Former Expert-Policy and programming, Divn A-Policy, DGXVII-Energy, European Commission. Author of several books on energy, environment and development published in UK, Canada and USA.
( xtran04@yahoo.com) His latest book is ‘The Final Energy Crisis', Pluto Press, London. Also, Petroleumworld is negotiating the rights for the Spanish edition. I
ts views are not necessarily those of PETROLEUMWORLD.

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Petroleumworld News 03/14/2011


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