Japan poised to boost kerosene purchases from S Korea after refinery shutdown

Singapore — An outage at Japan's refinery in Hokkaido could significantly increase the country's reliance on South Korean kerosene supply, as the unexpected loss of the refining capacity could endanger its heating fuel stock levels amid lower-than-average temperatures nationwide.

Japan's second-largest refiner Idemitsu Kosan shut the sole 150,000 b/d crude distillation unit at its Hokkaido refinery after a fire late Jan. 7 near the residual pump attached to the CDU, a company spokesman said early Jan. 8.

The unexpected refinery outage comes at a time when heating demand for kerosene is strong amid a cold spell. This is also the only refinery in the northern island of Hokkaido, the country's largest heating demand center.

The latest refinery outage could tilt Japan's kerosene supply and demand balance as the country has witnessed a steeper decrease in the middle distillate inventories.

Japan's kerosene stocks stood at 14.89 million barrels as of Jan. 2, down 2% week on week, according to latest data from Petroleum Association of Japan. It was also down 2.2% from a year ago.

"The shutdown came at a time when kerosene demand [in Japan] is at its highest, and market sentiment will be very bullish by this news. Also, kerosene inventory in Japan is not very high now, so it is easy to predict that Japanese importers may seek urgent or prompt kerosene barrels moving forward," said a Northeast Asian refinery source.

"Idemitsu will soon try to import South Korea's inventory to Hokkaido," said a middle distillate trader based in Osaka with direct knowledge of the matter.

Japan's kerosene imports have increased significantly in recent months as a result of the country's low refinery runs amid the coronavirus pandemic, coupled with the outlook of the colder than usual winter weather over December-February.

The country's kerosene imports surged 22.6% year on year to 51,464 b/d in November, and more than doubled from October's 21,126 b/d, according to the Ministry of Economy, Trade and Industry data.

The latest monthly weather forecast released Jan. 7 by the Japan Meteorological Agency showed that Tohoku and Hokkaido in the north of the country are forecast to experience below 30-year average temperatures over Jan. 9-Feb. 8.

South Korean kerosene

South Korean refiners told S&P Global Platts that the fuel suppliers are eager use the Japanese market as an outlet to offset their jet fuel/kerosene inventory pressures.

South Korea's heating fuel exports to Japan typically spike during the November-February cold season and the cyclical trend will likely remain strong in the first quarter following the Hokkaido plant shutdown.

South Korea's kerosene exports to Japan averaged just over 6,600 b/d in the third quarter, but they were estimated at around 16,700 b/d in the fourth quarter and the shipments could reach at least 24,000 b/d in the first quarter of 2021, according to fuel marketing sources at SK Innovation and S-Oil surveyed by Platts.

In South Korea, kerosene accounts for very little of the country's overall heating energy source during winter. Households and the commercial sector in the country rely mostly on gas and electricity for winter heating.

In addition, the country has been grappling with rising stocks of unwanted jet fuel/kerosene as aviation fuel consumption tumbled more than 40% on the year for the first 11 months, with local airlines having suspended most flights on international routes since March.

Japan domestic supply

It was not immediately clear when Idemitsu would be able to restart the Hokkaido CDU, as it has yet to assess the impact from the fire, the spokesman said.

Idemitsu plans to transfer heating fuels from its other refineries in the country to Hokkaido, the spokesman added.

"Idemitsu may also buy kerosene from trading firms for short-covering. If that happens, it will be a factor to push up [domestic] market prices," said another local trader based in Tokyo.

According to the Tokyo-based trader, spot heating fuel prices in Hokkaido are at similar levels as in Kanagawa and Chiba. Japan's domestic spot kerosene rack prices in Kanagawa and Chiba were both assessed at Yen 50,800/kiloliter, or $77.78/b, Jan. 7, up Yen 700/kiloliter from Dec. 30, Platts data showed.