Oil Plunges as Japan's Refiners Shut Plants After 8.9-Magnitude Earthquake

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Source: Bloomberg

Oil fell in New York, headed for the first weekly decline in a month, after the world’s strongest earthquake in more than six years struck the northern coast of Japan and forced refiners to shut processing plants.

Futures slipped for a fourth day after the temblor in the world’s third-largest crude user. A fire at Cosmo Oil Co.’s oil refinery in Chiba, outside Tokyo, is spreading, a Fire Department spokesman said. JX Nippon Oil & Energy Corp. shut its refineries in Sendai, Kashima and Negishi. Prices had dropped before the earthquake on speculation the economic recovery in the U.S. may falter.

“Crude had been edging lower since before the earthquake,” said Victor Shum, a senior principal at consultants Purvin & Gertz Inc. in Singapore. “It depends on how long the plants are shut, but if they are shut for an extended period that would reduce demand for crude.”

Crude for April delivery tumbled as much as $1.83, or 1.8 percent, to $101.87 a barrel in electronic trading on the New York Mercantile Exchange. It was at $101.96 at 9:27 a.m. London time. Prices are down 2.4 percent this week.

Read more: http://www.bloomberg.com/news/2011-03-11/oil-plunges-as-japan-s-refiners-shut-plants-after-8-9-magnitude-earthquake.html

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Why is this happening? It seems incredibly counter intuitive. Will we certainly see a reversal of this tomorrow?

[Tunkamerica]

1. My uneducated guess would be that production in Japan will be virtually halted

until all of this devastation starts to get sorted out.

[mirror wall]

2. Of course it will. But why is that driving prices DOWN? Shouldn't they be going up as there is less

capacity and more demand from Japan? Or is that actually not what's driving it but rather the conditions in Saudi Arabia and the rest of the Mid East?

[melm00se]

12. this is a worldwide market and localized market forces in play here

and the 2 can move in opposite directions.

Hypothetically, Japan imports 10,000,000 bbls/day, refineries are running at 100% capacity and this refinery processes 20% of their crude oil imports. If that refinery shuts down, there is nowhere for that 2,000,000 bbl/day of oil to go (in Japan) so it goes back into the worldwide pool of available oil. Supply increases, demand, driven by refining capacity (by Japan) decreases so worldwide prices will go down.

The reverse will occur within the Japanese markets. Their demand for refined oil will remain the same (or, more than likely, increase) but their supply will drop. This will drive up the prices for refined petroleum products.

[Tunkamerica]

13. Why would there be more demand? Everything is shut down. Roads closed.

Factories destroyed. Power out. Less demand by far.

[BumRushDaShow]

3. My thought was this was counter intuitive

in this world where supposed supply and demand drives the prices, despite the fact that the crude supplies (that have already been pumped) are in excess and being kept in parked tankers around the world to artificially drive down the supply.

But apparently in this case, losing refineries would make it even harder to hide that excess crude because the trickle to the refineries will now be halted, and more crude will be backing up and will need to be stored and hidden.

[pam4water]

4. Hhmm Japan is the 3 or 4 biggest oil consuming county in the world. Do they think the quake will

bring the Japanese economy to a stop?

http://en.wikipedia.org/wiki/List_of_countries_by_oil_consumption

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5. That makes sense. Prices will increase again once they get the gears moving and may spike when

rebuilding starts to overlap with a return to at or near full capacity. I wonder how long that will take?

[dotymed]

6. It is counterintuitive

only the speculators who rig the prices, know for sure.

[Thor_MN]

7. Price isn't driven by supply and demand right now

It being driven by people gambling what oil could be sold for in the coming months. Just like the size of a poker pot bearing little relation to the value of the card hands in play, it's more about how much the players think they can screw out of the other players. Sad thing is, at the end of the hand, consumers have to pony up whatever the players decided the pot was worth.

[pam4water]

10. That has been the case for a lot of the time since the Eron loop whole was opened. It's just

so rarely moved it down. But could be a panic in the market too. They only took half ass measures to close the Eron loop whole.

[FLPanhandle]

8. Not really.

You and I don't use crude oil directly. The customers for crude oil are refineries. Now, some of the largest customers are no longer buying crude oil. This means there is more crude oil on the market for the remaining refineries. Tankers heading to Japan will now have to get other refineries to buy their oil.

[earthside]

9. Look for the price of gasoline.

In other words, the price of refined product should spike ... since Japan's refineries are down.

So, since there is a genuine limited supply of fuel (Saudi Arabia imports gasoline) this is where the price will soar.

And, yes, since there is ample supply of oil in the U.S., the price of crude is more subject to the speculators than the momentary ups and downs of global reserves.

[pam4water]

11. Was Japan a net exporter of refined gasoline though?