Japan's refiners mull further run cuts as COVID-19 dents demand

Tokyo — Japanese refiners are considering cutting operating rates further in April - despite the rate in March falling to the typical turnaround level before the maintenance season has started -- as global demand for refined products plummets amid the coronavirus pandemic.

At least two Japanese refiners are looking at the potential need for run cuts in April amid a drop in domestic demand for key oil products such as gasoline and gasoil, coupled with country's relatively light spring refinery maintenance season this year, sources said.

Hopes of a regional transportation fuel demand recovery in the second half of 2020 have been dented by Japanese Prime Minister Shinzo Abe and International Olympic Committee President Thomas Bach agreeing Tuesday to postpone the Tokyo Olympics until no later than the summer of 2021 due to the global COVID-19 pandemic.

"We are facing an increased probability of run cuts because we are now facing declining demand across the products, not just for jet fuel," a Japanese refiner source told S&P Global Platts.

A source with another Japanese refiner expressed similar sentiment. "Taking into account the declining demand, we will keep an option for run cuts," the source said.

Japan's crude throughput fell a further 2.9% week on week to 2.82 million b/d over March 15-21, the Petroleum Association of Japan said Wednesday. It was last lower 21 weeks ago at 2.81 million b/d over October 20-26 last year, during the autumn refinery turnaround season, on the back of reduced gasoline output.

JET DEMAND PLUMMETS

Jet fuel demand will plummet further in April as domestic and international flight suspensions in Asia are extended across Europe and the US, resulting in a further drop in Japan's jet fuel exports, roughly 80%-90% of which are bonded sales.

The country's second largest refiner Idemitsu Kosan expects its bonded jet fuel demand to drop 40% year on year in April and domestic jet fuel demand to drop 20% over the same period, company chairman Takashi Tsukioka said on March 19.

"We may need to adjust run rates if overall [petroleum] demand declines," Tsukioka said, adding the reduction in jet fuel demand alone would not be the decisive factor for cutting run rates.

A number of Japanese refining sources also said the jet fuel demand outlook for April was bleak, which would slash bonded jet fuel sales. Increasing flight suspensions by major international airlines could see Japan's bonded jet fuel sales drop more than 50% year on year in April, the sources said.

In the four weeks to March 21, Japanese refiners exported 4.03 million barrels of jet fuel, down 22.9% year on year, according to the Petroleum Association of Japan data compiled by Platts.

The impending run cuts came as refining margins for jet fuel hit a record low. The front-month Singapore jet fuel swap crack against Dubai swaps tumbled to plus 1 cents/b on Monday, the lowest since S&P Global Platts began tracking the spread in March 2001, before rebounding to plus 68 cents/b on Tuesday.

The bearishness was also evident in the steep contango structure in the derivatives market. The front month April/May timespread was assessed at minus $2.39/b at the 0830 Asian close Tuesday, down $2.02/b from March 2.

While the economics for storage remain viable amid the deep contango, several industry sources questioned if there was any need for it, given the demand rout and the close to tank top situation at regional storage facilities.

Reflecting the prolonged weakness in the jet fuel market, the Q2/Q3 Singapore jet fuel quarterly spread remained deeply entrenched in negative territory at minus $5.92/b at the 0830 GMT Asian close Tuesday.

GASOLINE SLUGGISH

Japan's gasoline shipments for the domestic market fell 10.2% year on year to 20.44 million barrels in the four weeks to March 21, while gasoline exports fell 2.6% over the same period to 2.33 million barrels, according to the PAJ data compiled by Platts.

The rate cuts see Japan join refineries in Taiwan, Vietnam and South Korea in reducing run rates in response to faltering demand both domestically and across the region.

Nevertheless, the cuts have done little to ease concerns over lagging demand that has dealt a heavy blow to gasoline margins, with crack spreads plunging to more than 10-year lows.

The FOB Singapore 92 RON gasoline crack against front-month ICE Brent crude hit a 12-year low of minus $5.74/b at the 0830 GMT Asian close Tuesday. It was last lower December 11, 2008 at minus $5.91/b, Platts data showed.

"The [gasoline] market is getting more and more bearish with news of city lockdowns," a gasoline market participants said.