Refining Margins Surge in Asia After Japan Quake Knocks Out Power Plants

The profit from making gasoil in Asia surged to the highest in 2 ½ years and fuel oil’s loss narrowed the most in a month after Japan’s biggest earthquake knocked out power plants and refineries.

The premium of gasoil, or diesel, to Dubai crude rose 13 percent to $23.26 a barrel, according to data compiled by Bloomberg. Fuel oil’s discount to the benchmark Middle East crude narrowed 36 percent to $5.18 a barrel, the biggest drop since Feb. 14. Utilities and factories may switch to alternatives to replace lost output from nuclear plants.

Japan, the world’s third-largest crude importer, used an average 430,000 barrels a day of fuel oil in December 2010, according to International Energy Agency estimates, while diesel consumption was 450,000 barrels a day. Asian fuel-oil premiums doubled in July 2007 after an earthquake shut Tokyo Electric Power Co.’s Kashiwazaki-Kariwa nuclear plant, the world’s biggest. The 8.9-magnitude temblor on March 11 shut 11 reactors and 21 thermal plants, cutting 9 percent of the power output.

“This is a super bullish factor for the Asian middle distillates and fuel-oil market,” said Akira Kamiyama, an energy derivatives trader at Mitsui & Co. in Tokyo. “Factories which have their own generating facilities will begin to buy diesel, while utilities will start purchasing fuel oil.”

Death Toll

The death toll from the earthquake and ensuing tsunami that engulfed towns on the northern coast may top 10,000, according to local media. More than 350,000 people are in emergency shelters while the country grapples to contain its worst nuclear accident after an explosion at a reactor north of the capital.

The quake, which was followed by a 6.2 magnitude aftershock, has shut or disrupted supplies from refineries accounting for about 29 percent of the nation’s processing capacity, or 1.3 million barrels a day. Refinery utilization may fall to about 65 percent following the earthquake, from 88 percent beforehand, Edinburgh-based Wood Mackenzie Consultants Ltd. said in a report on its website.

Japan’s Economic and Fiscal Policy Minister Kaoru Yosano said government still has 1.3 trillion yen ($15.8 billion) in discretionary funds from this year’s budget that can be allocated for quake relief.

Tokyo is threatened by blackouts as power supplies are cut and the city will experience shortages for several weeks, Tokyo Electric said. Areas will have no electricity for three hours at a time, the company said.

Power Shortfall

Japanese utilities typically rely more on nuclear power, natural gas and coal for electricity generation because they are cheaper. They make up for shortfalls by burning more oil in power stations. Japan imports most of its low-sulfur fuel oil from Indonesia and Malaysia, according to Wood Mackenzie.

“Japan has had a series of problems with nuclear power plants and this is many more times serious,” said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. “My gut feeling is that it will be bullish for oil because they will have to make up for nuclear power. It’s going to have a positive effect on fuel oil.”

Demand may also rise for so-called middle-distillate fuels such as diesel, as factories use their generators to provide electricity, according to Mitsui’s Kamiyama.

Nuclear Meltdown

Tokyo Electric is battling to prevent a meltdown of two reactors at the Fukushima Dai-Ichi plant, after explosions at the units. The permanent shutdown of the plant would have a “tremendously big impact on the fuel market,” Kamiyama said.

JX Nippon Oil & Energy Corp., Japan’s largest refiner, shut plants in Sendai, Kashima and Negishi. Cosmo Oil Co.’s facility in Chiba, outside Tokyo, was on fire, while Showa Shell Sekiyu KK said it halted shipments at refineries in Keihin and Yokkaichi. TonenGeneral Sekiyu K.K., Exxon Mobil Corp.’s Japanese refining unit, shut all major units at its Kawasaki refinery near Tokyo.

“Japan is one of the most active gasoil exporters,” said Kamiyama. “All the other Asian refiners, such as South Korea, Taiwan and China, are likely to benefit from the loss of refining capacities in Japan.”

Benchmark 180-centistoke fuel-oil cargoes loading from Singapore cost $651.50 a metric ton, while gasoil cost $129.45 a barrel, according to Bloomberg data.

While Japan imported 790,000 barrels a day more oil products than it exported last year, overseas diesel sales exceeded purchases by 150,000 barrels a day, according to Wood Mackenzie estimates.

Crude prices could drop because of the decline in refinery utilization, Kamiyama said. A reduction in the country’s economic activity as a result of the earthquake may also depress the need for crude, according to Mitsubishi’s Nunan.

Oil futures on the New York Mercantile Exchange dropped for a fifth day, sliding as much as 2.7 percent to $98.47 a barrel and trading at $99.04 as of 6:22 p.m. in Singapore. Prices rose to the highest in 29 months on March 7 amid output cuts in Libya.

To contact the reporters on this story: Ann Koh in Singapore at akoh15@bloomberg.net; Yuji Okada in Tokyo at yokada6@bloomberg.net

To contact the editor responsible for this story: Clyde Russell at crussell7@bloomberg.net

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