Analysis: Japan's August motor fuel demand lowest in decades on coronavirus, slowing economy

Tokyo — A resurgence of the coronavirus pandemic hit Japan's peak summer holiday demand for gasoline and gasoil in August, bringing down the motor fuels' demand to the lowest level in decades, with market sources expecting slow recovery in coming months amid stagnant economic activities.

Japan's August gasoline demand is estimated at 4.38 million kiloliters, or 888,688 b/d, down 9% year on year, while gasoil demand is estimated to have dropped 6% year on year at 2.66 million kl, or 539,705 b/d, the country's largest refiner ENEOS said Aug. 28.

An ENEOS official attributed the drop in gasoline demand to a spike in COVID-19 infections, which reduced the motor fuel demand during the peak summer holiday season in August, whereas gasoil demand also fell from lower operations of tourist buses amid the pandemic.

The August estimates would put gasoline demand at the lowest for the month since 1989, when sales were at 4.06 million kl, and gasoil at the lowest in August since 2008, when sales were at 2.44 million kl, according to the Ministry of Economy, Trade and Industry data.

In spite of having four consecutive holidays in September, Japan's gasoline demand will be weaker than August after having passed the peak summer driving season, local traders said.

Slow economy

Gasoil demand, which has been impacted by lower industrial plant and truck run rates in August, is not expected to recover in September amid a slowing economy, the traders said.

"This year's sluggishness is far greater [for gasoil] amid the prolonged suspended tourist buses, coupled with low industrial plant runs," said a source with a Japanese refiner.

Japan's gross domestic product for April-June slid 7.8% from the previous quarter at an annualized rate of minus 27.8%, with domestic private consumption, exports and services in the world's third largest economy taking a hit from the coronavirus.

The Japanese refiner source does not expect speedy recovery in the country's refinery runs in September amid stagnant domestic oil products demand.

Japan's refinery utilization rate stood at 70.5% of the installed 3.5188 million b/d over Aug. 16-22, according to the latest weekly Petroleum Association of Japan data, having fallen from 71.8% in the previous week to Aug. 15, which was the highest in 16 weeks during the country's peak summer holiday season.

Japan's spot gasoline market has retreated in recent days after a brief recovery in the first half of August following the summer driving season.

Japan's domestic spot gasoline rack prices in Chiba, east of Tokyo Bay, were at Yen 44,700/kl ($67.01/b) on Aug. 27, down Yen 400/kl from a week ago, when it was the highest in the month, according to S&P Global Platts data.

Regional demand

Like Japan, gasoil demand in Asia has similarly slowed as new infections are reported across several countries, once again disrupting gasoil consumption patterns.

Traders said the appetite for gasoil from Southeast Asian countries, such as Vietnam and Myanmar, has drastically slowed for August and September, while over in India, domestic consumption levels of gasoil were tepid on the back of localized lockdowns as well as a greater reliance on hydropower generation during the ongoing monsoon season from July to September.

The bearish sentiment resulting from a bleak demand outlook, further compounded by rising supplies of gasoil from northeast Asia, has weighed heavily on the Asian gasoil market.

At the Asian close Aug. 27, the physical 10 ppm sulfur gasoil crack spread against front-month cash Dubai narrowed to a near 12-week low at $4.55/b, Platts data showed. The physical crack to front-month cash Dubai was last lower on June 8, when it was assessed at $4.20/b, Platts data showed.

The coronavirus has likewise hit gasoline demand across Asia. Countries such as Vietnam, the Philippines, and South Korea saw their recovering driving activity impeded in August as governments reimposed movement restrictions in an attempt to hinder the spread of the virus. "[Gasoline] demand was starting to recover but now it has leveled off again due to the second wave," one Singapore-based source said.

Most recently as well, some states in India -- the world's third largest energy consumer -- were also reported to be planning another extension to localized lockdowns, which are in their fifth month now.

With demand across Asia fragile, the September-October 92 RON gasoline swap spread still remains in contango, being assessed at 10 cents/b at the close of Asian trade Aug. 27, Platts data showed.