Japan's trading firms raise gasoil imports to offset looming price hike

Tokyo — Japanese trading firms are ramping up gasoil imports amid expectations the country's top refiners will raise prices of major oil products significantly early-August, in line with firm Middle East crude OSPs, several market sources told S&P Global Platts July 17.

"There is no doubt that the price gap between Japan and overseas will widen further in the near future. Then, we have procured two spot cargoes of gasoil from South Korea," a trader said, adding that the first cargo will arrive at the end of July or early August, and the second one will arrive later.

A second trader also said July 15: "We imported gasoil last month, and another cargo is expected to arrive this month ... Normally, we import 50,000 kiloliter (314,490 barrels) of gasoil a year, but the amount could increase to 70,000 kl or even 80,000 kl this year as we believe that refiners will additionally raise their base price by about Yen 4,000/kl ($5.95/b) in early August."

Japan's trading firms having a license for importing gasoil are required to import 50,000 kl of gasoil or more annually in average over the past three years to maintain the qualification.

Strong OSP influence

The expectations of a rise in base price by major refiners comes after ENEOS, the country's largest refiner, lowered its base price more-than-expected in early May, said market participants.

In early June and early July as well, unusual changes in the ENEOS base price was applied, indicating that ENEOS has changed its method to set the price.

ENEOS -- previously known as JXTG Nippon Oil & Energy -- typically announces its weekly prices on Wednesdays for cargoes loading from the next day until the same day of the following week. The refiner has a domestic market share of around 50%, and its prices are closely tracked by two other major refiners in Japan -- Idemitsu Kosan and Cosmo Oil.

ENEOS' weekly base prices typically track the week-on-week movement in crude oil procurement costs based on the daily average of Platts Dubai and Oman crude benchmarks, market sources said. However, the company seemed to have started to reflect the official selling prices, or OSP, premium/discount for Middle East crudes in its weekly rack prices since April this year.

"Refiners passed on the fluctuations in OSP for Middle East crudes [flowing to Asia] in the previous month to the first week of the current month of their wholesale prices," said a local trader. Irregular lowering of the base prices in the first week of June was also attributed to OSP reduction in May, the trader added.

Regarding the ENEOS base price in early August, Japan's market participants expect an additional increase of Yen 4000/kl or more as the July-loading OSP was raised by $6.1/b from the previous month.

Healthy import merits

The spread between Japan's domestic gasoil rack prices in Kanagawa and Japan's import parity for gasoil from South Korea averaged Yen 2,900/kl ($4.34/b) as of July 16, up Yen 700/kl, or 31.8%, from the June average, according to Platts data.

The import parity price is calculated at a premium to MOPS 10ppm gasoil assessments, plus freight costs for SR vessel on the South Korea-Kanagawa-Japan route as well as insurance and import taxes.

ENEOS has raised its weekly base price by Yen 8,000/kl ($11.87/b) as of July 15 from May 20, the last base price before the state of emergency, imposed to contain the coronavirus crisis, was lifted on May 25, according to Platts calculations based on the data from market sources.

According to the Ministry of Economy, Trade and Industry, Japan imported 477,207 barrels, or 15,394 b/d, of gasoil in May 2020, up 62.7% on the year. The cumulative import volume of gasoil from January to May 2020 was 2.67 million barrels, up 78 % from the same period of a year earlier, the data shows.

Surging kerosene stocks

Japan's total kerosene stocks came in at 11.24 million barrels on July 11, up 2.6% from a week ago, the Petroleum Association of Japan said July 15. The stocks also rose 12.7% from 9.97 million barrels a year earlier, Platts data showed.

"We already imported in April and May. It was because the differentials between domestic and imported prices had widened in April, and for the cargo discharged in May, it was because we forecast that an additional refiners' base price increase (based on OSP increase) would be applied in the future," the second trader said.

"The trading company's tanks for kerosene may already be full by importing cargoes. There is no waterborne kerosene trading at the moment. No one wants to sell it right now," he added.

ENEOS' base price for gasoil and kerosene stood both at Yen 43,500/kl ($64.53/b) as of July 17, and will be effective until July 22.