Japan, Libya and Heating Oil: The Relationship

The events in the past number of weeks are nothing short of mind-numbing. The stock markets are spinning along with commodities like heating oil, gasoline and crude oil. How is one to make sense of it all? What is going to happen next to heating oil prices? The reality is that know one knows exactly what will happen in the future, but we can educate ourselves.

What is happening in Libya affects the supply of crude oil (crude oil is the key ingredient in heating oil and has a direct affect on the price of heating oil). Libya is a producer of, some would argue, the very best crude on the earth. It contains very low levels of sulfur and is easier to refine into gasoline, diesel and heating oil. Libya’s exports are mainly to European refiners. Refiners make heating oil from crude oil, and so far European refiners have not been heavily affected by the supply disruptions. However, if unrest continues, and supply decreases, then crude oil and heating oil prices will rise further. Commodity prices will adjust higher or lower as the Libya situation becomes more stable or chaotic. Heating oil and crude price spikes associated with the situation in Libya are somewhat muted by the unfortunate events in Japan.

The situation in Japan affects the demand for crude oil. Lower demand means lower prices. Japan is the third largest consumer of oil behind the USA and China. Oil demand has been at a stand still as the country has been wrecked with natural disasters and nuclear contamination. Japanese oil demand is expected to remain muted as Japan gets itself back to normal. However, crude oil demand is expected to grow steadily with the reconstruction effort. In addition, petroleum products may be required to replace the destroyed nuclear power generation – increasing demand and this will apply increased upward pressure on pricing.

So where will prices go? No one can be certain. However, if things continue to be chaotic in Libya and Japan’s reconstruction effort takes off with a need for crude oil , then prices will likely rise. On the other hand, if Libya tensions ease and the Japanese construction effort is only moderate and their economy goes into recession, the result could be lower crude and heating oil prices.

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