Cease of Indonesia's crude oil export to depress Japan's power demand

Recently media reported that Indonesia considered ceasing crude oil export in order to secure domestic supply.

Indonesia used to be a member of the Organization of Petroleum Exporting Countries, but the nation has decreased crude oil production clearly since 2000 due to drain of old oil wells and a lack of investment in development of new oil fields.
The country's crude oil output in the first 10 months of 2011 fell to 899,000 barrels per day.

On the other hand, petroleum demand in Indonesia continues to increase. Consumption has been exceeding domestic production since 2004 and the demand reached to 1.36 million bpd in 2010.

Indonesia kept annual growth of gross national products above 6% during 2010 and 2011. The steady economic growth is likely to lift regional petroleum consumption further in the near term.

The country's crude oil exports were estimated at 480,000 bpd in October 2011. Even if Indonesia halts crude oil export, the nation's crude oil import is likely to be cut as well.
It means that the absence of Indonesian crude oil export will not affect the global supply and demand seriously.

The cease of Indonesian export, however, is likely to impact on Japanese electric power companies.
Japanese utility firms mainly use locally produced low sulfur fuel oil, or imported low sulfur crude oil from Southeast Asia for petroleum-fueled thermal power units.

Crude oil demand from Japanese electric power companies surged due to nuclear power shortage in 2011. Prolonged maintenance and inspection have been shutting Japan's most nuclear power units after the severe March 2011 earthquake.

Japanese ten major electric power companies bought 152,000 bpd of crude oil in 2011. It jumped by 117.7% from a year ago.

Japan's crude oil imports from Southeast Asia in the year soared 60% on year to 195,000 bpd, while the year-on-year growth of imports from Indonesia stayed at 27% due to the limited spare supply capacity.

Indonesia has accounted for about 50% of crude oil sources for Japanese ten major electric power companies. Especially, Tokyo Electric Power and Kansai Electric Power have bought about 70% of their necessary crude oil from Indonesia.

Stoppage of supply from such important vendor will give Japanese electric power companies a big burden. Oil refiners, who will be urged to produce alternative fuel oil, will have problems as well.

Higher fuel costs are likely to lift Japan's domestic electricity prices and depress electric power demand further.

Nuclear alternative fuels accounted for 40% of Japan's trade deficit

Japan recorded trade deficit in 2011 for the first time since 1980 because of decreased exports and higher energy costs. Addition spending for fossil fuels to make up for the nuclear power shortage also boosted import amount.

The spending to replace shut-down nuclear power plants seemed to account for 40% of Japan's entire trade deficit of 2.5 trillion yen ($32 billion) last year.

Japan's total crude oil imports in 2011 fell 2.7% from a year ago to 3.6 million barrels per day, according to the Ministry of Finance. Sluggish industrial activities depressed petroleum demand.

Crude oil imports from Southeast Asia, however, increased 52.7% on year to 190,000 bpd. Strong demand for low-sulfur crude oil for thermal power generation lifted imports.

Imports of liquefied natural gas, which is known as the main fuel for thermal power generation in Japan, also increased 12.2% from a year ago to the record 78.5 million tonnes.

In 2011, regional ten major electric power suppliers purchased 8.2 million tonnes of more liquefied natural gas than the previous year and bought 140,000 bpd of more petroleum compared with the previous year, according to the Federation of Electric Power Companies of Japan.

These fuels were estimated to cost about 980 billion yen ($12.5 billion).

Meanwhile, Japan's electricity supply fell 4.7% on year in 2011. It means the addition fossil fuel purchase was purely for nuclear power replacement.

Nuclear power had supplied 21-25 billion kWh per month of electricity in Japan before the heavy earthquake in March 2011. But the major accident at Fukushima Daiichi nuclear power plant has been making government hesitate to approve nuclear power units to restart after regular maintenance.

Only 4 of total 54 Japanese nuclear power units are operated now and those four units are also scheduled to be shut for maintenance in a couple of months.

Further spending for fossil fuels import is expected this year because no one knows when nuclear power plants will resume operations. Meanwhile, export volume may shrink further as limited generation capacity forces Japanese companies to reduce electricity use for their operations.

Did US energy consumption shift?

Recently, decreasing demand of U.S. petroleum products weighs on the crude oil market.
American Petroleum Institute announced that the U.S. petroleum deliveries in 2011 fell 1.2% from a year earlier to 18.95 million barrels per day.

Especially, gasoline deliveries decreased 2.1% on year to 8.8 million bpd. The motor fuel consumption seemed to have been depressed by the average retail gasoline price that jumped by 25% on year.

API also said that the U.S. petroleum products demand in December 2011 fell 5.9% on year to 18.57 million bpd, while the U.S. Energy Information Administration showed petroleum supply in the last week slipped 7.2% from a year ago to 17.9 million bpd. The decline of demand seems to become severe gradually.

Does the weak demand of petroleum products reflect declining U.S. economy?

The following chart shows that the movement between the U.S. petroleum demand and industrial production had a close relationship until late 2010. However, the correlation disappeared in 2011 when the demand of petroleum products decreased despite the steady industrial production index.

The market sentiment to the U.S. economy has improved since last September. Near-term forecasts are also relatively bullish. In spite of  that, the petroleum demand decreases further.

Meanwhile, the U.S. electricity supply in the first 10 months in 2011 rose 0.3% from a year ago and natural gas consumption increased 3.6% on year. They were contrastive with the dull petroleum demand. It suggests that entire U.S. energy demand is necessarily not decreasing.

Composition of the U.S. energy consumption is about 38% of petroleum, 25% of natural gas, 22% of coal, 9% of nuclear and 6% of renewable energies.


U.S. has relatively relied on petroleum, but the energy consumption may be shifting to other resources such as natural gas. Then such change may be causing the current disagreement between petroleum demand and industrial activities.

Aggressive development of shale gas has eased supply and demand of natural gas in North America in the past few years. Thus U.S. natural gas prices have been weaker compared with petroleum prices.

Crude oil price is more than six times higher than natural gas now if you convert both prices into million British thermal unit.

Crude oil prices have been more than 2.5-3 times higher than natural gas over the past two years after the market turmoil in 2008. It might be enough time to encourage industrial players to change energy use.

How long does Brent premium continue?

Brent crude oil price's premium over the WTI crude oil expanded sharply to the historical high level in 2011.
Although high quality WTI prices should be higher than the inferior Brent prices, some reasons lifted the Brent's premium over the WTI to near $30 per barrel.
The premium still stays around $12/bbl currently. How long does this situation continue?

Increased crude oil stockpile at the U.S. Midwest, and tensions in the Middle East and North Africa were explained as the main reasons for the surged Brent's premium.

The Keystone Pipeline that carries oil sand origin crude oil from Canada to Cushing Oklahoma started operations in February 2011. Cushing is known as the delivery point of physical WTI crude oil contracts.
440,000 barrels per day of crude oil inflow led the stocks at the area to the record level above 40 million barrels.

Moreover, the Egyptian revolution began in January 2011 and the Libyan civil war broke out in February. These events caused worries over crude oil supply to the Europe and accelerated the rise of Brent's premium to WTI.

International Energy Agency urged OECD member nations to release total 60 million barrels of their petroleum reserves in order to ease the tightened global crude oil supply following the shrunk output from Libya.

About half of the oil release was done by the U.S. between late July and early September and the huge supply helped the Brent's premium to rise further to $30/bbl.

However, the premium slipped to below $10/bbl after the end of Libyan civil war and the news about the Seaway pipeline's reversal project. The Seaway pipeline used to deliver crude oil from the Mexican Gulf to Midwest, but it will start carrying crude oil to the counter direction in April 2012 with initial capacity of 150,000 b/d. The capacity is scheduled to expand to 400,000 b/d in early 2013.

Forecasts of lower pressure on increasing crude oil stocks in the Midwest area led many market participants to expect narrower Brent's premium.

Goldman Sachs recently predicted the Brent's premium at $7/bbl for three months, $5/bbl for six months and $4/bbl for 12 months period.

Current market assesses the premium at $12/bbl. It seems to be affected by the soared crude oil imports into Midwest in 2011 in spite of that total U.S. crude oil imports decreased by 2.7% on year.

Despite the increased imports, crude oil stocks at Cushing peaked out in April 2011 and have kept downtrend after that. The premium above $10 seems to be making light of the decreasing stockpile.

Seaway pipeline is likely to depress the Cushing crude oil stocks. Was the impact by the first crude oil transportation route from inland Midwest to Mexican Gulf already discounted into the market when the news was reported in last November? Or will we see the Brent's premium start narrowing again after April?

Emission rights reflect weak oil demand

Prices of EU Allowance (EUA) of the European Union Emission Trading Scheme have kept clear downtrend since mid-2011. EUA recorded the lowest price in the phase II period (2008-2012) on Wednesday at € 6.45/ton.

EUA prices dropped below € 1/ton in late 2007 because of large amounts of excess emission rights that were scheduled to be invalidated by the end of the phase I period (2005-2007). However, under the current rules, European companies can carry over their excess emission rights to the next phase III that will start in 2013.

Companies are not necessary to rush to sell their emission rights within this year. Meanwhile EU-ETS operators have encouraged players to buy EUA at cheap prices because emission rights are likely to be more valuable in the phase III period due to tighten regulations.

Weak EUA prices despite those situations suggest that energy demand in European industries remains weaker and that pessimistic forecasts for the regional economic activities are dominant in the market.

Some companies are likely to accelerate the EUA price decline. They are facing shortage of running funds due to the decreased credit line and may try to sell their emission rights for cash.

Demand for the emission rights is deeply affected by energy use because almost 90% of greenhouse gas is generated from energy consumption.

When you compare the demands of petroleum products in the U.S. and Europe for a couple of years before and after the Lehman shock, demand in the U.S. shrunk by more than 7% after the severe economy crisis, while decrease in European demand stayed at about 6.5%.

It could be one of reasons for the wider Brent premium over the WTI crude oil in 2011 besides the heavy crude oil stocks at the U.S. Mid-West and the supply concerns for the Middle East and North Africa.

Does the bearish sentiment projected by the weak emission rights market lead the Brent premium narrower in the near term?

Petroleum demand shows decline of the World's Factory

Although forecasts of energy demand in OECD member countries are being revised downward due to the debit crisis in Europe and the unclear expectations for the U.S. economic recovery, many people are still optimistic for the growth of petroleum demand in emerging countries.

Especially, China is expected to contribute to nearly half of the global growth of petroleum consumption in the next few years. However, recent indicators suggest that the situation is not so optimistic like people anticipate.

The following chart shows year-on-year growth of industrial production and crude oil inputs of the U.S. and China.

The growth of the U.S. industrial production had peaked out in mid-2010 and crude oil inputs in 2011 frequently decreased year-on-year. Can we believe the continuous U.S. economic recovery that FRB says, despite the sluggish energy use?

Chinese economy is deeply affected by the U.S. which is the largest trading partner of China.
China's growth of crude oil inputs is roughly following that in the U.S. with about 3-months delay.

The growth of U.S. crude oil inputs rebounded during August and October 2011, but dipped in December.
Recovered Chinese crude oil inputs in November seemed to follow U.S., then the Asian giant's crude oil inputs may decrease after March 2012 affected by the latest U.S. activities.

Meanwhile, the growth of Chinese crude oil inputs in a downtrend throughout 2011 also generates worries.

The growth of ethylene production in China clearly showed slowdown in 2011. It even posted year-on-year decrease during August and October. Ethylene is a main ingredient for plastics and chemical fibres.

China has been expanding exports of electric appliances and clothing. The slump of plastic output in China coincides with recent media reports that many Chinese factories are closing.

China's monthly export amount seems to be extending favorably, but the amount in November 2011 failed to exceed the July figure because of the Euro zone debit crisis. China's export amounts towards the end of year usually exceed July-September figures except for 2008 when the Lehman shock depressed global economy seriously in the later half of the year.

If the growth of Chinese petroleum consumption in 2012 shrinks to the flat level or below the previous year level, the year's global growth rate of petroleum demand from 2011 might be less than half of the current forecasts at about 1.2-1.3 million barrels per day.
Chinese decline also reduces petroleum demand in other nations like Japan that supply raw materials and machinery to China.