By Robert Campbell
NEW YORK May 25 Oil bulls battered by a recent
slump in crude prices can take heart in at least one fact:
Japanese utilities are still buying sweet crude heavily,
propping up Asian oil prices even as Western benchmarks stumble.
Japanese utilities have been forced to crank up their use of
oil and natural gas to generate power, as a moratorium on the
restart of nuclear power plants drags on.
Amid the recent correction in oil prices, key Asian markers
have mostly held their ground against Dated Brent, suggesting a
sudden weakening of Asian oil demand cannot be blamed for the
Indeed, the economics of arbitrage flows of crude oil from
the Atlantic basin to markets east of the Suez canal may well
constitute a major support for benchmark oil prices.
All the more reason for oil traders to be keeping one eye on
the developments in the Japanese power sector.
Take the Brent-Dubai exchange of futures for swaps (EFS) price. It has hardly budged in recent weeks and
remains stubbornly below $4 a barrel.
Contrast that with the same period last year when the Libyan
civil war and a spate of North Sea production problems left
European refiners badly short of light sweet crude.
A more stark picture comes when looking at more specialized
grades. Take Indonesia's Minas crude , which is often used
for direct burning in power plants, and also plays a key role as
a regional benchmark.
Since early December, Minas has traded at a huge premium to
Dated Brent, peaking at over $16 a barrel on May 4. The spread
has since weakened but has yet to dip below $10 a barrel.
Heavy Minas buying by Japanese utilities has priced some
Asian refiners out of the market, but it has also opened the
door to West and North African grades to flow into the Far East
Traders say global firms such as Glencore
are reaping huge profits selling West African and Libyan
barrels to Asian refiners seeking cheaper alternatives to local
DISTORTIONS, RESTARTS AND AUTUMN
For now uncertainty over when, if ever, the Japanese
government will permit nuclear power plants to restart is
playing a huge role in determining the spot price of grades like
With long-term planning held up by the uncertainty over the
timing of restarts, Japanese utilities are mainly operating in
the spot market for direct burning crude oil.
This has built a premium into the price. At the same time,
utilities' reluctance to risk operational problems, amid tight
power supplies in Japan, has dissuaded them from using cheaper
Traders have tried to interest Japanese utilities in
directly burning West African grades of crude, for instance, but
caution has kept consumption to a few test samples so for.
As a result, utilities' need for a narrow basket of sweet
crude oils has heavily distorted the Asian market, forcing
regional refiners to rely on Atlantic basin crudes for cheaper
That, in turn, is supporting Atlantic basin oil prices. Look
no further for the steady flow of Forties cargoes to South Korea
If anything, Brent crude would probably be under enormous
selling pressure in the absence of these arbitrage flows, given
slack European oil product demand and the very well supplied
In the short term, the questions for oil prices are: What
happens if Japan allows large-scale nuclear restarts, and what
happens if utilities manage to broaden their crude slates beyond
the traditional direct-burn barrels?
The first case seems unlikely, given the strong skepticism
of the Japanese public over nuclear power, and the central
government's reluctance to ride roughshod over public opinion.
The second could provide some relief, but ultimately, the
switch would only be from regional grades to extra-regional
grades, which means the arbitrage window between Brent and Asia
would need to remain open.
In any case, a hot summer in Japan could easily negate the
impact of a few nuclear restarts and a modest broadening of
crude slates by utilities anyway by sending power demand
Things get more interesting in the autumn. Japanese power
demand should fall back then as air-conditioning loads decrease.
Will that reduce the call on crude oil for direct burning
sufficiently to knock away support from the Brent market?
For now, the mainstream opinion amongst oil analysts is that
demand, regardless of how soft it is right now, should rebound
strongly through the second half of 2012.
That would probably take up any slack in the market that
might come with decreased Japanese utility buying in the fall.
Combine that with a higher call on OPEC crude and a resultant
diminution of spare capacity in Saudi Arabia, and the stage
could be set for a run higher in Brent prices.
But if demand fails to rise as expected, and Japanese
utilities ease off buying enough to diminish Asia's thirst for
Atlantic basin sweet crude, the current healthy supply situation
in the Atlantic basin augurs for weaker Brent prices going