Analysis: Japan’s tight oil demand, supply balance keeps it vulnerable to imports
Japan remained a net oil product importer for the second year in a row in 2018 and is likely to remain an active product importer in 2019 as any unexpected refinery issues threaten to further squeeze domestic supplies, making the tight supply-demand balance even more fragile.
Japan’s oil product imports averaged 621,009 b/d in 2018, with imports of both gasoline and gasoil more than doubling year on year, exceeding oil product exports of 522,736 b/d, according to data released by the Ministry of Economy, Trade and Industry data last week.
Naphtha accounted for the majority of Japan’s oil product imports and were more or less unchanged year on year at 487,720 b/d in 2018.
The increase in Japan’s oil product imports last year was partly due to a relatively heavy refinery turnaround season over the spring-summer period, coupled with occasional unexpected refinery shutdowns.
The country became a net oil product importer in 2017 as its nameplate refining capacity fell to 3.5188 million b/d across 22 refineries as of March 31 that year, down 7.1% from 3.7897 million b/d, following local refiners’ response to refining regulations that led to a squeeze in capacity.
The capacity cut has tightened Japan’s supply and demand balance, and has supported an increase in oil products imports during the spring and autumn refinery season over the last two years.
UNEXPECTED REFINERY SHUTDOWNS
In addition to scheduled maintenance programs last year, Cosmo Oil unexpectedly shut the sole crude distillation unit at the 100,000 b/d Sakai refinery in mid-July, and it took almost three months to restart all units by mid-October, after having restarted the CDU on August 12.
Idemitsu Kosan’s Hokkaido 150,000 b/d refinery — the only refinery on the northern Japanese island – was automatically shut as a result of the 6.7 magnitude earthquake that rocked Hokkaido on September 6. It restarted all Hokkaido refining units on November 17, following the restart of the sole CDU on October 14.
The unexpected refinery shutdowns supported imports of gasoline and gasoil significantly over July-November, more than doubling imports of gasoline and gasoil to 35,167 b/d and 12,499 b/d, respectively last year.
Aside from refinery issues, Japan witnessed a rise in gasoline imports for most part of the year in 2018, except for December when imports slid 4.2% year on year to 23,186 b/d.
Relatively weaker overseas gasoline prices kept the arbitrage window to Japan open for most of the year, lead to rising inflows of cargoes.
The spread between rack Kanagawa 89 RON gasoline and FOB Singapore 92 RON gasoline prices reached the widest point last year on November 27, at $27.71/b, according to S&P Global Platts calculations.
After adding freight, premiums, taxes and other costs on top of FOB Singapore gasoline, the spread between the import parity price and the domestic rack market was around $16.90/b, according to Platts calculations.
TIGHT DOMESTIC SPOT SUPPLIES
The rise gasoline imports also came at a time when some domestic refiners were actively exporting gasoline instead of supplying to the domestic market, according to market sources.
For example, JXTG Nippon Oil & Energy, which holds roughly half of the domestic oil products market share, does not typically offering any oil products in the domestic spot market and instead exports its cargoes, according to company sources.
Tighter domestic products supply had increasingly prompted local traders to seek opportunities to bring cargoes into Japan, according to market sources.
Looking ahead, Japanese refiners intend to continue exporting their surplus gasoline, gasoil and fuel oil supply, typically on long-term contract basis and priced off Mean of Platts Singapore price assessments, according to market sources.
Imported oil products often end up in the southern and western parts of Japan, due to the proximity to South Korea, Japan’s major supply source for oil products imports.
However, there is a limit to how much Japan logistically can import. A major Japanese importer of gasoline noted that gasoline imports had reached the upper limit.
“It is difficult to see maximum import volumes to go up much further due to limitations in tank space and berthing capacity,” said a source with the major Japanese gasoline importer.
In 2019, Japan’s import of gasoline may remain steady as long as domestic refiners keep their grip on domestic supplies tight, keeping the window for oil products inflows open, market sources said.