SINGAPORE: Fossil fuels may rise on Monday as energy will be in focus with investors more concerned about how Japan will replace lost electricity generation capacity than the negative impact of Friday's cataclysmic earthquake on the economy.
But at the same time, volumes may remain small at the start of trade as the market might look for clearer direction after Friday's broad-based sell-off and await answers on how quickly Japan would be able to stabilise operations at its power plants and refineries.
Following the magnitude 8.9 earthquake and devastating 10-metre tsunami that has shut down ports, power plants and refineries, the immediate reaction of many investors was to extend the week's sell-off across the commodities sector, leading to the biggest decline since last July.
Brent and WTI oil prices fell on Friday; Brent shed 3 percent and hit a low of $112.25 a barrel, while WTI dipped below $100 for the first time since early March on worries about demand from the world's third-largest economy and oil importer.
"In the shorter to medium term, expect to see a lot more fossil fuel going to Japan. From as early as Monday we are likely to see a rise in LNG, oil and coal as the market gears up for greater Japanese demand," said Jonathan Barratt, managing director of Commodity Broking Services.
"But there is a longer term story, too. The problems at their nuclear power plants are even more alarming. A serious accident could sway opinion against the industry putting the focus on fossil fuels again."
The dilemma for energy investors centres upon Japan's stricken nuclear reactors. Japan faced a fresh radiation threat on Sunday after the cooling system failed at a second reactor in what could be the world's worst nuclear disaster in 25 years.
The previous day, thousands were evacuated following an explosion and leak from the facility's No. 1 reactor in Fukushima, 240 km (150 miles) north of Tokyo. Strong aftershocks continued to shake Japan's main island as the desperate search pressed on for survivors from Friday massive earthquake and tsunami and the death toll was expected to rise. Media reports say it is likely to exceed 1,800. Nuclear plant operator Tokyo Electric Power (TEPCO) said radiation levels around the Fukushima Daiichi plant had risen above the safety limit but it did not mean an "immediate threat" to human health.
In order to make up for the lost generating capacity, Japan may be forced to import more fuel oil, LNG or coal.
"A key element of the disaster is its impact on the availability of electricity and fuel to support rescue and reconstruction efforts. The loss of 12,370MW of nuclear generation capacity and 10,381MW of thermal capacity has left an estimated 5 million people without power," said Eurasia Group analysts Robert Johnston and Will Pearson.
"Over the coming weeks, LNG imports will likely jump as gas-generated plants come back online and/or ramp-up to replace the nuclear capacity which is likely to be offline for months or more likely, years."
US natural gas futures also rose, climbing 1.5 percent to $3.889 per million British thermal units.
The outlook for other commodities, like base metals and rubber, may be more bearish. Copper slid as much as 2.2 percent below $9,000 on Friday. Copper later recovered later to close at $9,190, flat on the day.
Toyota Motor Corp said on Saturday it would suspend operations at all of its 12 factories in Japan on Monday, to confirm the safety of its employees.
"In the short term, the consequences for metals will be bearish. The damage to factories, the problems they will have with energy supply all threaten demand," said a trader in Singapore.
"But the longer term reconstruction is a different matter. Reconstruction, especially of the electricity infrastructure will consume huge amounts of copper, aluminium and galvanized steel. The scenario we had expected of slowing prices in the second half may need to be revised."
Japan accounts for around 5 percent of global copper consumption.
Gold prices ended higher to close just below $1,420 an ounce, but held short of recent record highs above $1,440. The moves in bullion would be more the result of swings in currencies than any direct impact from the quake, traders said.
"Currency flows will drive gold. After the initial sell down in the yen, it’s turned positive," the Singapore trader said.
"I think there is an expectation that Japanese industry will need to repatriate funds in order to cover cost of damage. Tokyo will probably need to borrow more, too, which should help keep the yen high. That will depress the currency basket and underpin gold."
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