The Fukushima nuclear power plant crisis did take at least 48 of the 50 nuclear reactors in Japan offline in a stage-by-stage manner resulting in heavy reliance on crude oil and its distillates for power generation. But, so far into this year, Japanese demand for oil has “normalised” as strong numbers have dissolved into thin air. This is primarily due to the following set of reasons:
--Decreased industrial demand: Q1 Industrial Production average of Japan was 5.9% lower y/y which made a dent on the electricity generation and consumption figures.
--Fall in heating demand: Higher temperatures from late March to early April prevented a surge in heating demand.
--Nuclear power capacity making a comeback: The share of nuclear power in Japan’s energy mix has increased from 2% to 5.3%.
--High base usage and limited capacity expansion for oil-powered facilities.
Weird stats
It is opportune at this moment to recall some statistics in this regard:
--As mentioned earlier there had been 50 reactors in Japan functioning before the nuclear disaster.
--These reactors generated about 22.62 mn MWh at the end of 2010. The actual capacity of the reactors was double the number!
--As the plants were shut down one-by-one in Japan, the power generation figures dropped to 1 million MWh, a 96% drop compared to 22.62 million MWh!
--Recent days have seen the generation climbing to 1.76 million MWh
--April saw Japan burning 220% additional crude oil and 94% in extra fuel oil compared to pre-Fukushima levels.
“It is unclear how many reactors will be coming back online or how many will have to be decommissioned permanently based on the findings of the regulation authority,” Barclays said in the report on Japanese oil demand. Hydro and thermal sources are now sharing the power generation burden of Japan these days.
“Although this (oil consumption) is extremely high, the situation is normalising with crude oil consumption for generation down 27% y/y while fuel oil demand for the same purpose has decreased 22% y/y. We expect this downward trend in crude oil and fuel oil usage to continue over H2 13,” Barclays estimated.
So, what will influence one of the biggest economies in the planet in the second half of the year as far as crude oil demand is concerned?
Influencing negatives
Weakening of Japanese Yen: As Japanese Yen has weakened to 100 for a Dollar, compared to 80 last year, Japan’s crude import basket has turned out to be very expensive. For instance, March 2013 had seen the basket becoming most expensive since October 2008 breaking the 10500 mark and reaching 10875 for the month. The highest this basket has come to rule was at 14627 in August 2008. (But that was primarily due to a rally in underlying crude oil prices.)
Needless to say, importers of Japanese crude and fuel oils have begun to feel the heat of purchase. This should be read in the context of a possibility of range-bound trade in crude oil in the days to come.
Meanwhile forex market strategists at Barclays, “expect USD/JPY to rebound to 103 over the next 3-6 months because they expect it to be a bellwether if the government’s policy for targeting higher inflation is credible. Additionally, they expect the US economy to gain strength in H2, 13 and support market expectations of Fed tapering, leading to broad USD strength.”
Not good news for Yen bulls as well as crude oil importers in Japan.
Potential nuclear renaissance: It is clear that liberal democrats who are in power in Japan, especially, the Japanese PM Shinzo Abe want to push the start button in nuclear reactors, as and when the regulatory authorities give a green signal. The measure is deemed important by Abe and his team as only then would his party be able to carry out its economic agenda and secure their long term interests.
But the ride may not be smooth. On June 2, thousands of protesters took to streets in Tokyo in defiance of the Abe’s plan. They have alreadyc collected almost 8 million signatures against it. Meanwhile a nuclear plant in Tsuruga was found to be sitting on a fault line and thereby susceptible to earth quakes making its chance of getting approved almost nil.
“The authorities will continue to review plants and applications for potential restarts, though Abe’s push for imminent wide-scale nuclear power seems highly unlikely,” Barclays said in the report.
Influencing positives
Diesel cars and Abenomics: Diesel cars are becoming much more popular in Japan as the they increasingly turn out to be eco-friendly and subsidies for clean diesels kick in. No wonder Japanese gasoil demand has jumped 2.5% year-to-date.
“Last year, the higher call on fuel oil and crude for power generation trumped the negligible flat growth in gasoline, kerosene and gasoil. This year, we expect these refined products, particularly gasoil, to produce a slightly more measurable rate of growth,” Barclays said in the report.
However, domestic sales of new cars in Japan as well as trucks and buses have been falling by 7.3% y/y in May even as the drop may not be as steep as had been expected.
Meanwhile, with Abenomics under work, Japanese real GDP growth is expected to see annualised gains of 3.5%-3.7% over the four quarters starting second quarter in 2013 as Yen weakens further and fiscal spending climbs along with wealth effect taking routes on equity rallies.
All these factors can positively contribute to oil demand growth in Japan.
SPR sales: In a bid to replace heavier grades of crude oil with lighter ones--given the improved appetite for latter--Japan’s METI sold about 4.4 mb of crude from the country’s Strategic Petroleum Reserves.
The ministry is estimating to buy back 6.29 mb of light grades, saying they are waiting for the right moment. If carried out over a two-month span, it would boost imports by an additional 104 thousand b/d.
“In our view, given further depreciation of the yen expected…we would not be surprised if they come into the market sooner rather than at the tail end of the year,” Barclays said.
Taking all of these factors into consideration, Barclays expects Japanese oil demand growth to come down by a marginal 0.03 mb/d or 0.63% in 2013.
Source: Barclays