Does oil demand suggest Japan's economic recovery?

Forecast of Japanese economic growth in 2013 by IMF was reported recently at 1.2% on year. It was same as the previous prediction done in October. Although the stay was relatively better result than down grade in western countries, Japan's slow growth rate is still thought to weigh on global economy.

However, petroleum demand is showing sign of recovery in Japan since early December. The steady fuel demand seems to represent economic recovery.

Crude oil processing by Japanese refiners recorded year-on-year increase during April and May 2012 since those figures were compared to serious slump following the severe earthquake in 2011. But the nation's petroleum demand slipped to negative on year in June-September 2012. It posted temporary recovery in October but slipped again in November. Then, Japan's crude processing has increased on year over the past seven consecutive weeks.

Another major energy index, electricity supply also recorded year-on-year growth in November and December. Can we see that these stronger energy demands represent Japanese economic recovery?

Of course, chilly weather condition has boosted energy demand during the current winter season. The Federation of Electric Power Companies mentions  about the influence over power demand by weather in its monthly reports.

But electricity demand in the Tokyo Metropolitan area is estimated at 2.1% decline on year in the first 25 days in January. In other words, petroleum demand keeps steady growth despite slowing electricity demand in this month.
Therefore, recent increase of petroleum demand seems not only to be used for heating.

Japan's monthly average temperature in October 2012 was 0.58 degrees Celsius above the past 30-years average, according to the Meteorological Agency. Meanwhile, November average was 0.33 degrees below the long-term average and December average was lower by 1.32 degrees.

We can find that the temperature deeply affects on electricity demand, however, petroleum demand shows different movement.

Will Japanese petroleum demand fall again in the coming spring season, or continue to be firmer based on the economic recovery?

Arab Spring and crude oil prices

Algeria hostage crisis has finished with death of 23 hostages and more than 30 terrorists.
This crisis was not caused by the Algerian domestic factor. The terrorists aimed to stop French intervention into the northern Mali dispute. That means similar crisis is likely to occur in anywhere in the oil field in Middle Eastern nations that have poor security situations. Therefore the crisis supports the crude oil market.

On the other hand, the dispute in Mali is said to begin after rebels were trained practically and obtained weapons through the Libyan civil war in 2011. So the Libyan civil war caused the Algerian hostage crisis indirectly, and the Libyan civil war was triggered by the Arab Spring started in late 2010.

The Arab Spring democratic movement defeated corrupt and authoritarian regimes in Libya, Egypt, Tunisia and other Arab nations, however, those countries have not recovered stable society yet. Muslim extremists are expanding their affect in the region.

Let's take a look at crude oil price movements before and after the Arab Spring period.
Crude oil prices declined to below $40 per barrel after the Lehman shock capped the historical price surge during 2007 and 2008. Then the US quantitative easing lifted crude oil prices toward $80/bbl but the market failed to rise further.

Later, crude oil prices did not influenced much by the QE2, however, started rising in step with the Arab Spring and reached to $100/bbl when the Libyan civil war broke.

Although crude oil prices fell following the cease of Libyan civil war, the Syrian dispute and the Iran sanction have continued to sustain oil prices above $80/bbl.
Middle Eastern geopolitical situation certainly has been a more important factor for the oil market after the Arab Spring.

However, only Libyan civil war actually affected global crude oil supply significantly. Iran sanction gave buyers sufficient time to seek alternative supply, and the Syrian dispute has not hamper crude oil supply. Turmoil in Egypt or other nations also did not affect major crude oil supply stream.

We can see that even wars in Iraq or Libya did not destroy major crude oil production facilities because output in these nations rebounded soon after the cease.

An actual influence on supply by terrorists attack on each oil or gas field such as the recent Algerian hostage crisis is likely to be negligible.

We have been watching news about the Syria turmoil for long without judging the fairness. Many market participants are influenced psychologically despite the dispute does not affect crude oil supply. We might have to think why the Arab Spring has started.

US gasoline demand weakens despite firmer car sales

Gasoline stocks in the United States as of 4th January rose 4% on year, according to the data released by the Energy Information Administration. It was the highest level since February 2011.

US total petroleum supplies had been recorded 8 consecutive weeks of year-on-year increase before falling slightly in the latest EIA's weekly reports. However, gasoline supply has been decreasing on year over the past 7 weeks. Gasoline is accounted for 45% of total petroleum supply in the US.

Weekly average gasoline consumption researched by MasterCard Advisors also shows year-on-year trend since March 2011. Retail price fluctuations seem not affect on consumption at the level of over $3 per gallon. The consumption survey recorded the year-on-year increase only once during the last year.

The following chart is comparing US weekly gasoline supply and production data provided by the EIA. Production exceeded supply in the late 2000's and the shortage was filled up by imports. US imported 1.0-1.6 million barrels per day of gasoline during the period.

Then gasoline supply began to exceed production in 2010's. The quantity subtracting supply from production had been minus before 2009 and have apparently changed to plus after 2010.
US imports about 0.5 million bpd of gasoline recently, while gasoline exports are more than 0.4 million bpd.

The reason of slump in gasoline demand is of course that people are reducing driving opportunities.
Monthly automobile sales in the US were stable between 16 and 18 million units since early 2000's, according to the Bureau of Economic Analysis, but the figures dropped during late 2007 and early 2009. The sales quantities were often below 10 million units in 2009.

Meanwhile, US car sales has started recovering since Q4 2009. The latest figures posted 15.3 million units that is close to the previous level.
However, the recovering automobile sales unfortunately does little to support gasoline demand.

Higher sales of hybrid cars or fuel-efficient cars seems to limit gasoline consumption. Car owners are also changing life style after the Lehman shock.
Since steady automobile sales could not support gasoline consumption, negative prediction is likely to dominate the market in the future.

May people of the US use more gasoline again if retail prices decline to below $2 per gallon?

Will China and Japan contend for LNG?

Chinese firms are reported to be looking for spot Liquefied Natural Gas due to the supply shortage caused by recent chilly weather.
Although natural gas imports through pipelines are relatively cheaper and are flexibly  transported, current supply shortage seems to force Chinese to buy spot LNG.

Natural gas demand in China is forecasted to surge in the future.
U.S. Energy Information Administration predicts that Chinese natural gas demand exceeds Japan in 2012 and will be two times larger than Japan in 2020's.

The following chart which is drawn by the EIA data released in 2011 is neglecting the Japanese gas demand boosted by the nuclear plants shutdown. Natural gas demand in Japan has already exceeded 4 trillion cubic feet in 2011. Even though, the long term comparison between Japan and China seems to follow the relationship shown in the chart.

Some people expect that Japan and China will compete on the procurement of LNG in the near future. However, Japan's LNG demand is unlikely to surge further, as EIA predicted.

Japan's historical high LNG imports was recorded in January 2012 at 8.15 million tonnes. Much larger imports than that are unlikely to be seen in the future.

Although thermal power plants in Japan have raised operation rates due to the nuclear power supply outage, the country's LNG unloading has been already reached to the physical capacity limit. Japan has to construct new unloading facilities if wants to import more LNG.

Moreover, Japanese power companies are aiming to resume nuclear units rather than building new thermal power plants. Therefore, long-term growth of LNG demand in Japan seems to be slowly.
The nation's LNG imports in Jan-Nov in 2012 rose 11.6% on year to 79.6 million tonnes, but the November figure fell 4.5% from a year ago.

Meanwhile, China's natural gas imports during Jan-Nov in last year rose 36.7% from a year earlier to 38.1 billion cubic meters (equivalent to 28 million tonnes of LNG). Domestic natural gas production in the same period only increased by 6.8% on year to 97.6 bcm, so imports made up for the shortage caused by 15% on year growth of consumption during the period.
China's LNG imports during the first eleven months in 2012 rose 20.3% on year to 12.87 million tonnes, which accounted for 45% of total natural gas imports.

Currently, Chinese LNG imports are about one-sixth of Japan. Because China only has six LNG import terminals with total capacity of 18.8 million tonnes per year. But the country's LNG terminals capacity has doubled in the past two years and the 12th Five-Year Plan aims to boost the nation's total LNG unloading capacity to 87 million tonnes per year by 2020.

However, China is also constructing gas pipelines toward Central Asia or Russia. Its gas imports through the pipelines are forecasted to rise to about 40 bcm (equivalent to 29 million tonnes of LNG) by 2020. Domestic shale gas production is predicted to reach to about 100 bcm by 2030.

EIA forecasts 30.4 bcm of natural gas demand in China in 2020. Meanwhile, domestic production could be about 21 bcm due to growth of shale gas supply, so required imports would be less than 10 bcm.
If pipelines will deliver 40 bcm in 2020, required LNG would be less than 5.5 bcm which is equivalent to about 25 million tonnes per year.

Because newly constructed unloading facilities in Qindao or Hebei etc. are estimated to add 12 million tonnes per year of capacity within two years, China could hold more than 30 million tonnes of enough LNG unloading capacity.

If China increases LNG unloading capacity to 87 million tonnes following the five-year plan, it could be too excess. Lots of Chinese LNG import facilities projects are likely to be cancelled or downgraded, except for the case of suspending shale gas development.

On the other hand, Persian Gulf nations are aiming to raise LNG supply, while the US is going to start LNG shipment to Asia. Even if China increases natural gas consumption with steady economic growth, LNG supply in Asia seems to be likely to be ample.

Global oil market has changed the structure

Change of the global petroleum supply and demand structure that was caused by the shale revolution has been obvious this year.

Shale oil production increased especially in North America and influenced significantly on local crude oil prices. The U.S. Energy Information Administration chose Brent crude instead of domestic WTI for reference price in its long-term forecast report for the first time, since the domestic marker price has been far different from other international marker prices.

World petroleum demand exceeded supply during 2011 due to the supply disruption caused by the Arab Spring and the Libyan civil war, but the supply became excess in 2012. Although OPEC member countries reduced output in the later half of this year, average supply and demand balance in 2012 is estimated at 50,000 barrels per day of excess by the EIA.

Meanwhile, EIA forecasts 50,000 bpd of supply shortage in 2013. But OPEC and International Energy Agency still predict slight oversupply in the next year. (see the table)

OPEC and IEA do not give forecasts for total global petroleum supply figures. But we can calculate necessary OPEC crude oil by using their prediction on global demand and petroleum supply excluding OPEC crude.
According to both organizations' figures, needed OPEC crude oil supply in 2013 are estimated below the current production quota of 30 million bpd.

Latest estimation on OPEC crude production are between 30.5 million bpd and more than 31 million bpd. So, global petroleum supply could be excess if OPEC members do not continue to reduce supply further.
However, we have not seen less OPEC output than production quota for long. Therefore, global petroleum market is likely to be slight oversupply in 2013.

On the other hand, that oversupply is unlikely to move the crude oil prices.
Oversupply of 1.6 million bpd caused crude oil prices to sink to the lowest level in past 3 decades in 1998, while the market was supply shortage of 1.6 million bpd before crude oil prices reached the historical record in 2008.

The gap between global oil supply and demand in the next year is expected at about several tenth thousand bpd, and such small figures won't influence on the crude oil market.

Global petroleum supply was capped at around 85 million bpd in the later half of 2000's. The limit of traditional crude oil production seemed to be one of the reasons of crude oil price surge during 2007-2008.
The shale revolution has already removed the limit.

Since the shale revolution is also boosting natural gas production all over the world, the global consumption structure of fossil fuel is changing as well.

Crude oil prices are unlikely to be supported by supply factors in the future, except for severe supply disruption by the war or a case of significant environmental regulations against shale oil/gas development.

Introduction of strict regulation on energy production seems to be quite difficult, as offshore oilfield developments are still ongoing globally despite the shocking oil spill in the Gulf of Mexico in 2010. The shale revolution is unlikely to be retracted.

Economic recovery urges nuke plants resumption in Japan

Japanese utility firms ceased all nuclear power plants in June this year due to the anti-nuclear movements following the severe accident in Fukushima. Then Kansai Electric Power company has only restarted two units.

Most power companies got over the high-demand season during summer without nuclear units. Electricity demand in the KEPCO's service area during the summer season was also less than the supply capacity except for restarted nuclear plants.

These results encouraged anti-nuclear movements, but the stable power supply without nuclear units have been supported by not only the effort of power saving but also by the continued economy decline.

Year-on-year growth of Japan's industrial production shows decrease in most of the months in this year except for during March and May when figures are compared to the turmoil period after the severe earthquake. It is natural that the power demand in this year is also decreasing.
If Japanese economy continues to shrink further, electricity demand will also decrease and nuclear plants are no longer needed.

However, December's Monthly Economic Report by the Cabinet Office changed the overall economy outlook to "unchanged". The report had told downward revisions in the past four months.
Although exports and capital investments are still in weak tendency, individual consumption seems to show sign of recovery.
Easing monetary policy in order to exit from deflation is also expected to stimulate the Japanese economy, therefore, the risk of further economic recession seems to be relatively decreasing.

Current recovering energy usage in Japan seems to be reacting to the situation. Crude oil processing volume posted increase on year in the recent two weeks after the previous slump, according to the Petroleum Association of Japan. Electricity supply in November rose for the first time in the past three months, according the to the Federation of Electric Power Companies.

On the other hand, KEPCO's daily maximum power demand exceeded the supply capacity excluding nuclear plants in couple of days in December. It means that the company failed supplying enough electricity without nuclear units.

The insufficient supply capacity was caused by unexpected higher power demand due to the chilly weather besides maintenance shutdown at thermal power units. The company cannot do enough maintenance at thermal power plants if it keeps ceasing nuclear units.

Two giant utility firms Tokyo Electric Power Company and KEPCO kept power supply reserve rate at above 10% until summer season, but recently these figures often decline to single digit. Especially, TEPCO doesn't have enough capacity. If economic recovery will boost electricity demand, supply shortage is likely to occur.

Since Japanese electricity demand does not seem to surge by two digits numbers continuously even in the economic recovery period, utility firms could be able to keep enough power supply without nuclear units in the near term.

However, the continual stable power supply would definitely require further economic decline, if Japan does not prepare enough alternative power supply source such as new gas-burning thermal power units.

Is Chinese economy really recovering?

Recently, Chinese economic data show recovering. Since exports are still in slump, analysts describe that these positive changes have been led by the domestic demand.

HSBC's December manufacturing PMI was 50.9, the highest figure in the past 14 months. Industrial production in November posted the first two digits growth since March, according to the National Bureau of Statistics.

Energy consumption is also rising in step with the recovering economic data. Year-on-year growth of Chinese electricity output remained below 3% during the second and third quarter, but it rose to 6.4% in October and to 7.9% in November. It suggests revitalizing industrial activities.

Crude oil processing in China rose only 1.6% from a year ago during the first eight months in this year, but the growth rate increased to 7.0% in September and to 6.7% in October then to 9.1% in November.

Monthly petroleum products output tells us that surging gasoline and gas oil production suggest strong demand from the transportation sector.

Meanwhile, the balance between crude oil supply and processing apparently shows shortage of supply in the past couple of months. This means current increased crude oil processing in China is not a pre-planned activity.

Previously, monthly shortage was solved with averaging with previous and next months. However, recent consecutive shortage is likely reducing crude oil inventories in China.

Crude oil stocks excluding strategic reserve as of the end-October fell 3.5% from a month ago, according to Xinhua News. The inventory level seemed to decrease further in November.

Incidentally, the ample excess supply in the first half of this year was caused by the installation of 80 million barrels strategic reserve into the newly built facilities.

If domestic demand really leads economic recovery, China will have to import more crude oil to meet high processing. Import volumes in December and January may tell us the change.

On the other hand, Chinese government is scheduled to introduce a new petroleum consumption tax on 1st January 2013. The tax rate for fuel is 0.8 RMB per liter. Since current prices of regular gasoline are around 7.5 RMB per liter, pump prices will rise more than 10% after 1st January.

Rush demand before the enforcement of the new tax might be one of the reason of recent high petroleum demand. In that case, the demand is likely to shrink after January.