Traders said Japan would continue to be closely watched by financial markets at least for the next few days, because of Japan’s nuclear emergency and the potential for a massive aftershock and more natural disasters following Friday’s 9.0 quake.
Middle East crude premiums in Asia could fall short-term as refinery shutdowns in Japan after Friday’s devastating earthquake force spot cargoes onto the market, but levels should recover for May as undamaged plants step up fuel oil output to feed power demand.
Between 20 percent to 35 percent of Japan’s 4.5 million barrels a day refining capacity was shut down after the quake.
On the Dubai Mercantile Exchange, premium of Oman crude slid to about 80 cents a barrel last Friday, from $1.30 a day earlier for May supplies on the news. The differential surpassed $2 in mid-February as violence broke out in Libya.
Going forward, premiums are expected to recover as energy plants that were not damaged by the quake ramp up output to meet fuel demand. Crude oil demand is not expected to drop suddenly, but it may face some reduction in the short term.
Kuwait and Saudi Arabia are the big suppliers of Middle East crude to Japan. With refineries and ports closed, there will be a lot of cargo delays.
Uncertainty as to how long damaged Japanese refineries will remain offline could buffer the bearish effect of the quake on prices. Traders and refiners are now focused on when production may resume.
The effect on heavy sweet crude values might be bullish, as Japanese power generators turn to oil to offset the decline in output from nuclear plants.
On Monday, an explosion rocked the earthquake-stricken nuclear plant in Japan, where authorities have been working desperately to avert a meltdown.
