Japan's July motor fuel demand lowest in decades on weather, coronavirus

Tokyo — Stormy weather and a resurgence of the coronavirus pandemic limited the recovery in Japanese gasoline and gasoil consumption in July, with demand at its lowest in decades, making refiners wary of raising run rates sharply heading into the usual peak summer demand season in August.

Japan's July gasoline demand is estimated at 3.96 million kiloliters, or 803,471 b/d, down 8% year on year, while gasoil demand is estimated to have dropped 9% to 2.64 million kl, or 535,647 b/d, the country's largest refiner ENEOS said July 30.

The July estimates would put gasoline demand at the lowest for the month since 1989, when sales were 3.70 million kl, and gasoil at the lowest for the month since 2009, when sales were 2.61 million kl, the Ministry of Economy, Trade and Industry data showed.

The July gasoline and gasoil demand estimates were lower than July 17 estimates of a 4% year-on-year fall for gasoline and a 3% year-on-year decrease for gasoil, announced by Tsutomu Sugimori, president of the Petroleum Association of Japan and chairman of ENEOS Holdings.

"Gasoline [demand] is being hit by the increase in the number of coronavirus cases as people have refrained from going out," a Japanese refiner source said.

"Gasoil [demand] was sluggish on the back of decreasing industry plant run rates," the source added. "We understand that manufacturers' plants are at low run rates, which reflects the economic slowdown caused by the coronavirus pandemic."

August outlook

Japanese refiners and traders have mixed views about how much weaker on the year gasoline and gasoil demand will be in August. There is, however, consensus that it will be less than usual during Japan's mid-August peak driving period because of the coronavirus.

One Japanese refiner sees the drop in gasoline demand easing to a 5% year-on-year fall in August after the end of the rainy season but it could also drop by up to 10%, depending on the impact from people staying home from the pandemic, a company source said.

"We will keep our runs for [refining] units low [for August] as we see the same level of demand as in July," a source with another Japanese refiner said.

Despite a pick-up in domestic gasoline demand in the wake of lifting the state of emergency on May 25, Japan's refinery runs have been hovering at around 60% of the installed 3.52 million b/d capacity, according to the PAJ data.

The low refinery runs and feasible import economics will support inflows of gasoline in August. The spread between Japan's domestic gasoline rack price in Chiba and Japan's import parity for gasoline from South Korea has averaged Yen 6,300/kl ($9.53/b) month to date as of July 29, according to S&P Global Platts data, keeping imports feasible.

Fragile Asian gasoline market

The situation in Japan mirrors the state of the regional gasoline complex on which sentiment has turned bearish recently.

Market participants expect supply from China to grow, with refiners there turning to the export market to deal with a combination of high domestic inventories and run rates and sliding demand.

In addition to excess supply, new cases of coronavirus in Southeast Asian countries such as the Philippines and Vietnam have also sparked fears of demand slowing in the near term, should stringent movement restrictions be re-imposed by regional governments.

As a result, the FOB Singapore 92 RON gasoline crack against front-month ICE Brent crude futures was assessed at 65 cents/b at the Asian close July 29, a sharp drop from $2.36/b at the start of the month, S&P Global Platts data showed.

Gasoil inflows

The Asian gasoil market was largely supported in July as Northeast Asian gasoil sellers have been keeping a tight rein on production because of low refining margins at a time when gasoil demand picked up in countries rolling back coronavirus-related restrictions and restarting economic activities, market sources said.

Some gasoil flowed into some countries, including Japan, as a relatively cheaper option with domestic refiners curtailing production on very thin refinery margins, market sources said.

The MR-sized tanker Sunshine Express loaded gasoil from Singapore in early-July, discharging its cargo in Kawasaki, Japan, in mid-July, market sources said.

At the Asian close July 29, the cash differential of FOB Singapore 10 ppm sulfur gasoil cargoes was assessed at plus 22 cents/b to the Mean of Platts Singapore gasoil assessments. The cash differential of the benchmark ULSD grade was last lower nearly two months earlier on June 3, when it was assessed at plus 18 cents/b to MOPS gasoil assessments at the 0830 GMT Asian close, Platts data showed.