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Inside, confidential and off the record

Impact on energy markets


The tragedy unfolding in northern Japan is not unlike that seen in Sichuan, China 2008 or New Orleans, U.S. 2005. The United States is the largest economy and therefore, the largest consumer of Btus. China and Japan are the next two largest economies and as such, the second and third largest consumers of energy. To this effect, we do not think it unreasonable to estimate the potential impact on energy markets from the current situation around Honshu, Japan to the relative situation following Sichuan and New Orleans.

For instance, in the three weeks prior to Hurricane Katrina’s landfall in New Orleans, NYMEX petroleum products for November delivery (321 crack) averaged a 15.3% premium to crude oil. That same margin averaged a 24% premium in the three weeks following landfall and peaked at a 37.6% premium (i.e. 2.4× the pre-landfall value) in the fourth week.

In the three weeks prior to the 2008 Sichuan Earthquake, NYMEX products for July delivery averaged an 11½% premium to crude oil. In the aftermath of the quake the premium rose by one-sixth to 13.3% or $17.3 a barrel.

Thus, with one-third of Japan’s refinery demand for crude oil (≈4½ MMbbl/d) currently in question, we think a similar price path is about to take place today. That is to
say, when you juxtapose the loss of implied demand from one of the largest buyers of crude on the globe along with speculators on the NYMEX who own the equivalent of two months’ worth of said buyer’s daily intake of oil, then the odds shorten that we will see a widening in gross margins along the petroleum slate in the futures market.

In other words, we expect the cracks on the NYMEX to
benefit from the events in Japan.

As far as natural gas goes, global prices for LNG appear set to benefit from the loss of nuclear generation in Japan. That said, why this circumstance would be beneficial for NYMEX gas futures is a mystery. After all, the last time we measured it, the Henry Hub is about 5,800 nautical miles from Sendai. On the other hand, the Kenai peninsula in Alaska is only around 2,800 nautical
miles from Sendai.

In 2009 Alaskan exports of LNG to Japan summed 30.5 Bcf. Thus, the situation in Japan might be bullish for LNG, even LNG supplied from Alaska, but that does not necessarily mean it is bullish for NYMEX gas, regardless of how outrageously oversold speculators are at the moment.


- Stephen Schork / The Schork Report / 03/15/ 2011

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