Improved economics whet Japanese traders' appetite for gasoil imports

Tokyo — Several Japanese traders are looking to boost gasoil imports in the coming months amid an improvement in the import economics for the middle distillate, coupled with tighter domestic supply from refiners.

Gasoil imports, an oil product not commonly imported into Japan, is rising at a time when there has been a significant boost in Japan's gasoil import parity since January. Coincidentally, some South Korean traders are keen to sell their surplus gasoil supply.

"As an importer of the product, the current import parity is attractive, which enables us to make a profitable purchase," a Japanese trader said. "This large import parity even worries us because the widened arbitrage window would increase inflows into Japan and crush it [arbitrage window] shut."

Asian gasoil traders have said that the drag in product prices has resulted in some buying interest being reported from Japan for South Korean barrels.

"Gasoil prices are very low, so some Japanese traders are seeking... the purchasing volume is very small for now, but there is some buying appetite," an Asian gasoil trader said, adding that there was uncertainty over how much Japanese traders were keen to buy at the moment.

The Asian benchmark, Mean of Platts Singapore 10 ppm sulfur gasoil, has underperformed Japan's domestic gasoil spot prices amid fears of falling regional demand due to the outbreak of the coronavirus, or COVID-19.

As of Thursday, the spread between Japan's domestic 10 ppm gasoil rack prices in Kanagawa and Japan's import parity for gasoil from South Korea averaged Yen 8,500/kl ($12.48/b) so far in March, up Yen 2,500/kl, or 41.7% from the February average.

The import parity price is calculated at a premium to MOPS 10 ppm sulfur gasoil assessments, plus the cost of freight on the South Korea-Tokyo Bay, Japan route as well as insurance and import taxes.

Boosted imports

Japan's gasoil imports jumped to 549,766 barrels in January, three times more than the 177,794 barrels from a year ago, according to the latest Ministry of Economy, Trade and Industry data.

January's gasoil imports were supported by Japanese traders, with a part of these imported barrels allocated for the demand from Japan's Ministry of Defense, according to market sources.

With the arbitrage window for gasoil inflows from South Korea widening, some Japanese traders are increasingly concerned of slowing domestic demand in the wake of the coronavirus.

But other Japanese traders still expect gasoil imports in the coming months amid healthy import economics of the middle distillate and steady demand from the Ministry of Defence, coupled with tighter supply from local refiners, according to local traders.

"Supported by the favorable gasoil import parity, traders are understood to be increasing imports reasonably," a Japanese refiner source said. Some traders are also importing gasoil consistently to fulfill MOD's occasional tenders for its vessels," traders said.

Japan is importing small volumes due to the open arbitrage, but they are small parcels of not more than one LR2 cargo a month, a shipping broker in Tokyo said. This, however, market sources pointed out, was still significantly higher than in the past. As a whole, Japan remains a net exporter of the product.

"Idemitsu has a refinery division, which may possibly import a small volume [of gasoil], but the trading division is actually exporting robust volumes [of the product] from Yokkaichi and Chiba and loadings are currently ongoing," a source with direct knowledge of the matter said. When contacted, Idemitsu Kosan declined to comment.

Ample supply

South Korean traders, meanwhile, are looking to clear their increasing surplus gasoil in the face of diminishing domestic demand due to the outbreak of the coronavirus, according to market sources.

Two MR-sized cargoes for "very prompt" loading dates in March were sold at a deep discount of more than $1/b to MOPS 10 ppm gasoil assessment, FOB Korea, according to market sources. No further details on the trade were immediately available. However, Platts had assessed FOB Korea cash differential at minus 70 cents/b on Thursday.

Meanwhile, the Asian gasoil market has been weighed down by plentiful regional supplies even as demand has slowed on economic concerns. The bearishness has pressured overall fundamentals in the Asian gasoil market, with the weakness reflected in listless product crack spreads to crude, which have been hovering below the $10/b psychological support level.

At the Asian close Thursday, the FOB Singapore 10 ppm gasoil crack spread to front-month cash Dubai slipped 27 cents/b to $9.16/b. Apart from a brief rally to $10.08/b on Monday, the gasoil crack has been rangebound between $8/b and $9/b since February 26.

S&P Global Platts data showed that the gasoil crack spread was last at these levels almost four years ago in April 2016.