Get Ready for Oil to Rise Again

Jim Brown
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It is only a matter of time and conditions are building that could push oil prices higher again once the nuclear headlines disappear from view. Analysts are united in expecting a strong rise in demand in Japan in the weeks and months ahead. Unfortunately the problems in the Middle East have not gone away.

Japan's nuclear problems have not gone away and every headline seems worse than the last. Once headline suggests doom for thousands, the next claims the problems have been fixed and the next one is back with a new problem and negative outlook.

The one thing for sure is Japan's need for fossil fuels to replace its nuclear power losses. Japan has more than 50 reactors that supply 25% of their electricity. Of those 13 are now offline, some permanently. More than 28% of Japan's electricity comes from coal plus it has a large number of natural gas and crude oil fired plants. Five of its coal plants were closed by the quake.

They burned 300,000 bpd of oil during the peak demand of 2010. JP Morgan believes they will increase that consumption by 150,000 to 200,000 bpd to make up for lost production from nuclear.

Some analysts are now expecting Japan could consume as much as one million barrels per day more oil once the recovery effort ends and the rebuilding effort begins. That will come in the form of increased diesel consumption for backup power generators and heavy equipment used in clearing the mess and rebuilding. It will also come in the form of higher gasoline usage. The largest increase could be in heating oil and fuel oil. One analyst claimed they could increase usage by 500,000 bpd. The fuel oil is used to generate electricity in older plants. With as much as 20% of their total power offline it will require a lot of fuels of all types to fill the gaps. The saving grace for the grid today is the destruction of a large portion of the power lines in the earthquake area. That will come back slowly. That is reducing the drain on the grid at the present time.

Where is this additional oil coming from? Gaddafi is mounting a scorched earth policy in Libya and reports claim zero Libyan production is being shipped. It is looking more like Gaddafi will regain control of the country in the weeks ahead but most believe it will be many months, possible 2012, before full production of light crude can be restored. There are fears now that the rebels will destroy oil facilities rather than let Gaddafi regain control.

Offsetting this loss of 1.6 mbpd has been a minor increase by OPEC countries. The IEA claims Saudi raised production by 200,000 bpd, Kuwait 100,000 bpd and the UAE by 100,000 bpd.

The MEND rebels in Nigeria warned today they would soon commence simultaneous bombings and attacks on oil installations in the Niger Delta. I have been warning about this for several weeks. The MEND rebels typically return to attacks ahead of the April presidential elections. Nigeria is a producer of the light crude in such demand today after the Libyan production halt. If the MEND rebels are successful in their attacks, and they usually are, they could cut production in Nigeria by 200,000-250,000 bpd based on their prior successes. In 2006-2009 the rebels knocked Nigeria's production down from 2.6 mbpd to only one mbpd. Having Shell claim force majeure again will only increase the light crude shortage. Nigeria promised oil firms they had put in place adequate security to thwart any violence after the MEND rebels told oil companies they should evacuate the region before the attacks began.

India said today it had requested additional shipments of light crude from Nigeria. India said it had requested a 50% increase in crude shipments. In 2010 India imported 13.2 million tonnes from Nigeria and they wanted to bump that to 18.0 million tonnes by 2012. That would be roughly the equivalent of 400,000 bpd.

Indonesia said it was lowering production estimates from 970,000 bpd to 945,000 bpd due to natural declines in its producing fields. At the same time the government was thinking about raising the price for its estimate for crude prices from $80 a barrel to as much as $100 a barrel because of shrinking supplies and rising Middle East tensions. ICP crude was $113.03 per barrel on March 14th.

The worry in the Middle East is rising again after fierce attacks on protestors in Bahrain by soldiers and police. Reportedly seven protestors were killed and several hundred wounded. Two policemen and one Saudi soldier were killed. Raising the level of violence to the protests has risks to surrounding countries, especially Saudi Arabia. The Shia community in Bahrain is reported to be producing the largest number of protestors against the Sunni rulers. If this violent protest carries over into Saudi Arabia we could see damage to oil facilities. At least that is what analysts are claiming as the major problem. Bahrain has an insignificant level of crude oil. Iran is also said to be festering with random protests. With the news blackouts from Iran it is tough to know what is real and what is hype. Iran produces about 4.0 mbpd.

If the market not been affected by the nuclear headlines and quake pictures out of Japan the insertion of 1,000 Saudi troops and tanks into Bahrain would have sent oil to $120. This is a very big step by Saudi and the GCC and I doubt it will just fade away. Once Japan's news fades I expect oil prices to take center stage once again.

Oil prices are going higher despite a slowdown of demand in the USA last week. Higher prices are taking their toll already but this timeout for Japan will allow U.S. drives to become accustomed to paying over $3. Once summer demand begins there will be a real shortage of light crude and that means oil over $100 for the coming months.

Jim Brown

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