Japan's Golden Week gasoline demand recovery at risk with state of emergency

Tokyo — Hopes for a gasoline demand recovery during Japan's Golden Week holiday are being thwarted as the government Tuesday declared a state of emergency in a bid to contain the coranavirus pandemic, which is expected to severely restrict movement during the peak driving season.

Japanese refiners and traders now expect the Golden Week gasoline demand to drop as drivers will be restrained from going out during one of Japan's peak driving seasons, pressuring some refiners to cut runs further in coming weeks, market sources told S&P Global Platts. Golden Week typically runs from late April to early May.

"While Tokyo and Osaka will be subject to the state of emergency, gasoline consumption will collapse as the Japanese tend to follow self-restraint requests and there will be hardly anyone going out even though this is not a lockdown," a trader in Osaka said.

At least two Japanese refiners are looking to cut runs further because of expected drops in gasoline demand, with one refiner looking to minimize its spot gasoline exports, sources with the refiners said.

STATE OF EMERGENCY

Japanese Prime Minister Shinzo Abe declared the state of emergency, which impacts several parts of the country including Tokyo, but it will not be a nationwide lockdown.

The state of emergency measures to curb the spread of the coronavirus pandemic will cover Tokyo, Kanagawa, Saitama and Chiba in the east as well as Osaka, Hyogo and Fukuoka in the west for a month to May 6, and it urges the public to stay at home.

With the measures, Japan aims to hit a peak in the increase in COVID-19 cases in two weeks if each individual can reduce physical contacts with others by 70-80% during the period, Abe said at a press conference.

"In order to achieve the 70-80% reduction, we request people refrain from going out, and this is a basis of assumption for getting out of the state of emergency in one month," he said.

As it is not a lockdown, public services such as transportation will continue. Japan's top two refiners JXTG Nippon Oil & Energy and Idemitsu Kosan said they are ready to ensure their oil products supply remains stable, and have business continuity plans in place. Refiners are considered an essential service in Japan and would likely be required to continue operating during the state of emergency.

In a statement following the declaration, the Petroleum Association of Japan said that petroleum supply, which is essential to the economy and social life, will be maintained as usual.

Japan's state of emergency declaration comes on the heels of a recent spike in COVID-19 cases in Tokyo and other major cities. As of Monday, more than 3,900 people in Japan are affected with COVID-19.

RUN CUTS

One Japanese refiner, which has already cut its refinery runs, might cut its runs further should it face a drastic fall in its products demand, a source with the refiner said.

"In principle we do not export [spot gasoline cargoes]," said the source, adding that the refiner still has some term exports. "We have already lowered our crude distillation unit operations in order to zero [spot] exports. We may cut runs further depending on the demand declines."

Japan's crude throughput dipped 0.2% week on week to 2.81 million b/d in the week ending March 28, according to the Petroleum Association of Japan data. That's the lowest since October 13-19, when it was 2.68 million b/d during the autumn turnaround season.

With slowdowns in corporate activities expected as a result of the state of emergency, the transport sector will be hit more going forward, a refinery source said. This includes demand for gasoil as it is the main fuel for trucks.

REGIONAL IMPACT

With more extensive measures taken to stop the spread of the coronavirus, Japan joins fellow Asian countries -- Vietnam, Singapore and Thailand -- in taking additional precautions to curtail domestic transmission of the virus.

Vietnam's major cities Hanoi and Ho Chi Minh City have prepared for possible lockdown, Singapore schools and most workplaces will close for one month from Tuesday and Thailand's six-hour night curfew came into effect last Friday.

These measures are expected to cause regional gasoline demand to dip further, sources said, adding pressure on an already bearish regional complex.

"The fact is that demand is hardly there anymore. While people aren't coming out as much, there is still room on the downside," one Singapore source said.

The physical FOB Singapore 92 RON gasoline crack against front-month ICE Brent crude futures fell to minus $10.69/b at the Asian close Monday, just shy of the record low of minus $10.74/b seen on November 20, 2008, Platts data showed.

The Asian gasoil market has also been hit on a combination of excess supplies and limp demand, with regional governments rolling out nationwide lockdowns and containment measures which have resulted in a sharp contraction of domestic gasoil consumption patterns and spurring refiners to export surplus cargoes.

The weakness has been reflected in a tumbling cash differential for the FOB Singapore 10 ppm sulfur gasoil grade, which has been on a downward trend for the past 15 consecutive sessions.

At the Asian close Monday, the cash differential for 10 ppm sulfur gasoil for loading from Singapore fell 35 cents/b to minus $1.46/b to MOPS gasoil assessments, FOB.

(Updates with prime minister comments.)