OIL FUTURES: Crude Falls As Japan Quake Shuts Refineries

March 14, 2011

   Oil futures fell sharply Monday on expectations that Japan's crude demand will suffer in the wake of Friday's devastating earthquake and tsunami, though analysts said the effects could be short-lived.

   Six Japanese refineries capable of processing almost 1.4 million barrels a day of crude oil have been shut because of the 8.9 magnitude earthquake, according to a Japanese refining company document viewed by Dow Jones Newswires. The quake is also likely to have widespread economic impact on the world's third-largest oil consumer.

   At 1230 GMT, the front-month April Brent contract on London's ICE futures exchange was down $1.10, or 1%, at $112.74 a barrel. The front-month April contract on the New York Mercantile Exchange was down $1.53, or 1.5%, at $99.63 a barrel.

   "In the very short run, it will be negative for crude demand that almost 1 million barrels a day of Japanese refinery capacity is reported shut down," said Torbjorn Kjus, an oil analyst with DnB NOR.

   However, Kjus said oil demand could quickly rebound--and even surpass pre-quake levels--as the country rebuilds. With 10 nuclear reactors shut down, Japan may also need to import large amounts of oil and fuel oil for power generation.

   Kjus estimated that the quake could boost oil and refined product demand by between 250,000 and 300,000 barrels a day. Japan's demand was nearly 5 million barrels a day at the end of 2010, according to the International Energy Agency.

   Oil prices were also under downward pressure as the protest movements that had swept through the Middle East and North Africa looked to have hit a roadblock late last week. Protests planned for Saudi Arabia Friday failed to take off, easing fears that the world's biggest oil exporter would be the next country to face unrest. Meanwhile, troops loyal to Libyan leader Moammar Gadhafi took back key oil towns from rebels, raising the possibility that some crude exports from the country could resume.

   "A rapid victory for Gadhafi will clearly have a bearish impact on the oil market as it could restore Libya's oil production rather quickly," said SEB in an analyst note.

   The price decline was halted after news agencies reported that over 1,000 Saudi troops had entered Bahrain. The move came "after repeated calls by the [Bahraini] government for dialogue, which went unanswered" by protesters calling for democratic reforms, AFP reported.

   Bahrain is not a major oil producer, but the involvement of Saudi Arabia in the conflict reignited fears that unrest would continue to spread in the region.
The ICE's gasoil contract for April delivery was down $2.25, or 0.2%, at $961 a metric ton, while Nymex gasoline for April delivery was down 3.11 cents, or 1%, at $2.9566 a gallon.

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