Business

Oil price up on Mid East turmoil and Japan energy needs

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The oil price has rebounded as markets refocus on the Middle East, as well as Japan's energy needs.

Brent crude futures broke back above $113 a barrel, while US light, sweet crude reached $100 again.

With Libyan production already near zero, markets took fright at the turmoil in Bahrain and the risk it may spread to neighbouring Saudi Arabia.

Meanwhile, with much of Japan's nuclear power sector shut down, the country is set to increase energy imports.

Energy imports

The market had initially taken fright at Japan's earthquake and tsunami on Friday, with crude prices falling from recent highs on fears that Japanese demand would slump.

Brent crude dipped to $107.35 a barrel earlier in the week, while US crude hit $96.21.

Large parts of Japanese manufacturing have been shut down in order to assess damage from the twin disasters, and are likely to operate below capacity for months as the government rations electricity.

Markets had feared this would also affect global production, as many industries - such as cars and computer manufacturers - rely on Japan to produce critical parts.

However, analysts say it is becoming increasingly apparent that with its electricity generating capacity severely limited, Japan will need to significantly step up its energy imports.

Japan's nuclear capacity - which accounts for nearly 30% of electricity generation - has been hardest hit, with 11 of its 54 reactors not operating.

Image caption Several countries have offered to increase LNG shipments to help Japan with its power shortage

The total loss of generating capacity is estimated at anywhere between 10% and 40%.

Power shortages are expected to remain a problem for at least six months, and may even intensify in the summer when households typically increase electricity consumption for air conditioning.

The country is expected to need more finished fuel products, as well as coal and liquefied natural gas (LNG), which can be used for power generation.

"Refined products such as fuel oil and gasoil are trading at premiums to Brent, and that should put upward pressure on Brent," said Thorbjorn Bak Jensen, an oil analyst at Global Risk Management.

Russia, Korea, Indonesia and Qatar have all offered to increase LNG exports to Japan, while Shell also volunteered to increase its shipments.

As a result, gas futures in Europe - the market from which much of Japan's needed gas will be diverted - have risen sharply since Friday's earthquake, up 14% at their peak on Wednesday, and up 12% as of Thursday afternoon.

Spillover fear

Meanwhile, events in the Middle East have resurrected fears about oil supplies.

In Bahrain, a clampdown on protestors - supported by 1,000 Saudi troops invited into the country - resulted in six deaths on Wednesday.

The state-owned Bahrain Petroleum Company had to cut back some of the 250,000 barrels-per-day output at one of its refineries on Thursday because of staff shortages related to the civil unrest.

"If things continue, I think we will be seeing a rise in the price of products, because at this point we don't know when the staff will return to work," one Bahrain-based trader told the Reuters news agency.

Although Bahrain's crude production is tiny, markets fear that unrest may now spill over into neighbouring eastern Saudi Arabia, which is home to a large part of the oil infrastructure of the world's biggest crude producer.

As in Bahrain, that part of Saudi Arabia is home to a predominately Shia Muslim population that wants to assert its rights against a Sunni monarchy.

Image caption Even if the Libyan conflict ends quickly, damage to infrastructure could affect oil exports for some time

Protests by a few hundred Shia in Saudi Arabia on Wednesday were also put down by security forces.

Furthermore, Iran - which is run by Shia clerics - has been voicing support for the Bahraini protestors, and there are fears that the country, which is another major oil-producer, may intervene directly.

Meanwhile, in Libya, the rebels appeared to be holding their own against Colonel Gaddafi's troops, suggesting the civil war may last longer than feared.

Libyan output - which accounts for 2% of global production - has already been reduced to almost zero by the conflict.

However, analysts say that even if there is a quick victory for Col Gaddafi, Libyan oil will be subject to sanctions, and much of its export facilities have already been damaged.

Although Saudi Arabia has been making up for the Libyan shortfall, it comes at a time when global oil production capacity has been stretched by a stronger-than-expected recovery in world demand.

Nuclear option

Another factor playing on oil traders' minds is an apparent global shift away from nuclear energy back towards fossil fuels, in response to the unfolding disaster at the Fukushima Daiichi plant.

"A single big accident can entirely change the trend for nuclear power plants," said Nomura analyst Kuniharu Miyachi, who said the incident may prove a turning point.

Prior to the earthquake, Japan had been targeting an increase in its reliance on nuclear power from 30% to 50% by 2030. The government has not said whether it plans to change that target.

Many European countries had also been talking up the future of nuclear power in recent years, as a way of meeting carbon emission targets and reducing energy dependence on Russia and the Middle East.

However, on Thursday German Chancellor Angela Merkel called for a "measured exit" from nuclear power.

It comes after her decision on Tuesday to close Germany's seven oldest nuclear facilities, meaning more electricity generation had to be shifted to coal-fired power stations.

The decision helped push the cost of European carbon emission permits on Wednesday to their highest level since October 2010.

Meanwhile, China also decided on Thursday to suspend its nuclear building plans.

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