Global energy markets brace for a shock, as Japan is expected to seek replacement to large amounts of the country’s nuclear power capacity, devastated by natural disasters.
Japan is the world’s third largest oil importer, after China and the U.S., and the top importer of thermal coal and liquefied natural gas. Abrupt change in energy production could affect global commodities markets, analysts warn.
The final effect of the earthquake on Japan’s energy needs will also depend on the extent of damage to the country’s economy and whether the government orders the precautionary stoppage of other reactors for safety checks, experts added.
Japan has already shut down approximately one fifth of its nuclear capacity. The country no longer influences energy markets, as it once did, because of its shift away from oil. The loss of nuclear power will force utilities to scramble for crude, thermal coal and LNG as replacements.
Recently, a report released by BofA Merrill Lynch Global Research also forecasts changes in the global economy outlook caused by the oil price volatility.
As the data flow has improved, BofA Merrill Lynch Global Research has been leaning toward bumping up it’s global growth call. Unfortunately, the oil price surge more than cancels out that upgrade. The commodity team has significantly increased its baseline forecast. As a result, the analysts have trimmed 0.1ppt of global GDP in both full-year 2011 and 2012 to 4.3% and 4.8%, respectively.
At the same time, the research team boosted global CPI inflation by 0.2ppt in 2011 to 3.9%, leaving 2012 unchanged at 3.4%. With offsetting growth and inflation implications, the forecast revision has had only a minor impact on the G-3 central bank calls. BofA Merrill Lynch has already pencilled in early rate hikes in the UK and the Eurozone. The team has made some upward revisions to it’s rates calls in the emerging economies, especially in LatAm and EEMEA, the latter due both to the oil shock as well as to the expectation of earlier hikes by the ECB.
With the forecast revision, the risks around growth have been heavily skewed to the downside before natural disaster struck Japan last Friday.
If production shutdown spreads outside of Libya and energy crisis spreads further in Japan, analysts across the world should revisit their forecast. If oil prices go above their historic peak of about $150 a barrel on a sustained basis, a global recession becomes a real risk.
