Japan to require 12 mil barrels of kerosene imports for winter heating demand

Tokyo — Japan is set to require at least 12 million barrels of kerosene imports for the country's winter heating demand season as local refiners are expected to keep their refinery runs at around 70% in the coming months, S&P Global Platts' calculations based on market fundamentals and weather outlook showed.

The estimated minimum import of 12 million barrels of kerosene in the November-March period is based on assumption that Japan's kerosene demand is to be at the same level as a year ago, when the country had experienced warmer-than-usual winter, Platts' calculations showed.

The country's kerosene imports might even be larger if it experiences severe cold spells.

"It is possible to see the domestic [kerosene] demand to increase by 10% from a year earlier," said a source with a Japanese refiner.

Taking into an account a 10% increase in the domestic kerosene demand, the country would need to import at least 18 million barrels in November-March to meet the domestic demand, Platts' calculations showed.

Aside from Tohoku in the northeast and Hokkaido in the north, temperatures in 10 of Japan's 12 regions are forecast to be below the 30-year average over November-January, the Japan Meteorological Agency said in its three-month weather forecast Oct. 23.

Low runs

The Platts calculations are based on industry information, which includes data from the Ministry of Economy, Trade and Industry and the Petroleum Association of Japan.

The calculations are based on assumption that Japan's kerosene supply and demand is to be just about balanced if local refiners will not export any kerosene over November-March and keep their refinery runs at about 70% -- a level during the country's peak summer driving season in August.

This means Japan could face shortage of kerosene supply if some of the product is exported and the refinery runs are below 70% in the period, according to the Platts' calculations.

Japan's crude oil imports will likely remain at the current state until the end of 2020 amid the country's slow oil demand recovery from the coronavirus pandemic, said Petroleum Association of Japan President Tsutomu Sugimori Sept. 17.

Japan's refinery run rates have been hovering at low level for months because of plummeting jet fuel demand amid border restrictions in the light of the coronavirus pandemic.

The plunge in the jet fuel demand, which has capped an increase in Japan's refinery runs, has kept the average refinery run rates in the 60% range after briefly rising to 71.8% in mid-August during the peak summer holiday season, according to PAJ data.

"We will increase our refinery run rates towards the peak heating demand season but it will be difficult to increase the run rates above the peak level in the summer," said the Japanese refiner source.

Boosted sales

"It's a promising start," a source with another Japanese refiner said when asked about the domestic kerosene sales in October, adding that the earlier-than-usual start of the heating demand has boosted kerosene shipments in the month.

Japan's estimated kerosene demand for October jumped 24% on the year to around 880,000 kl, or 178,549 b/d, as heating demand picked up due to lower temperatures, the country's largest refiner ENEOS said Oct. 29.

"We believe the [kerosene] demand will increase from the previous winter," a source with the first Japanese refiner said.

"We have factored in [the demand increase] in our supply and demand outlook," he said. "If the demand exceeds our expectation significantly, we will import firmly."

Healthy import economics

Japan's economics of kerosene imports from South Korea has been feasible since the beginning of 2020 as domestic spot market has outperformed Asian sluggish market, traders said.

"Hokkaido is already oversupplied," a source with a major Japanese trader said, adding that traders have been importing kerosene into Hokkaido -- the country's largest heating oil demand center -- even during the summer, thanks to healthy import economics.

Kerosene stocks in Hokkaido were at 759,200 kl, or 4.78 million barrels, in August, which was above the five-year average of 479,100 kl, according to the latest data from the Hokkaido Bureau of Economy, Trade and Industry.

Japanese traders, however, remain reluctant to sign term kerosene import contracts due to high premium against Mean of Platts Singapore jet kerosene for FOB South Korea, traders said.

"We are purchasing spot [kerosene] cargoes on SR-sized vessels," said the source with the major Japanese trader.

The spread between Japan's domestic kerosene rack prices in Kanagawa and Japan's import parity for kerosene from South Korea averaged Yen 8,000/kl ($12.05/b) in October, up Yen 7,200/kl, or 900.0%, from a year earlier, according to Platts data.

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