Japanese refiners see OPEC+ output hike impeding crude import diversification efforts

Japan may struggle to achieve the goal of reducing its overdependence on Middle Eastern crude, as OPEC+'s recent stance to increase output makes Persian Gulf barrels more economical than US or other arbitrage cargoes.

In recent years, the Japanese refining industry has emphasized the necessity of diversifying crude supply sources. As Asia's fourth-largest crude importer, Japan is extremely vulnerable to geopolitical issues in the Middle Eastern region, where Persian Gulf suppliers provide more than 95% of its total crude requirements.

Although concerns regarding disruptions in Middle Eastern sour crude supply and the logistical security between the Persian Gulf and Far East Asia have substantially subsided, the industry acknowledges that its high dependency on Persian Gulf suppliers is problematic, according to feedstock and logistics management sources at major Japanese refiners, including Cosmo Oil and ENEOS.

In times of tepid Asian cracks and refining margins amid global economic uncertainties, Middle Eastern crudes remain the most economical feedstock option. Diversification efforts have been initiated with increased shipments of US and Canadian barrels last year, but 2025 is poised to be another year of high reliance on Persian Gulf suppliers, as the OPEC+ members' output hike stance puts pressure on the Dubai price structure and official selling price (OSP) differentials, refinery feedstock managers noted.

Japan imported 2.45 million b/d of crude from Persian Gulf suppliers in the first quarter, accounting for 96.6% of the total 2.538 million b/d of crude imported during that period, data from the Ministry of Economy, Trade and Industry showed.

"With key suppliers like Saudi Arabia and the UAE willing to increase supply in the market, it's cheaper to seek incremental term barrels or additional spot cargoes than to buy extra cargoes from suppliers in the Americas," said a feedstock manager at ENEOS.

"Tougher sanctions on Russian oil trades led to a spike in Middle Eastern crude OSPs early in the year as Indian and Chinese refiners refocused on Persian Gulf barrels. However, we are relieved to see the OSP premium drop sharply since OPEC+ began implementing its production increase policy," according to a feedstock manager at another major Japanese refiner who spoke on the condition of anonymity.

Earlier this month, Saudi Aramco set the OSP differential for its flagship Arab Light crude for June loading at a premium of $1.4/b to the Oman/Dubai average, a sharp drop from the premium of $3.9/b set for March-loading cargoes.

Persian Gulf versus US crude

As the Persian Gulf crude OSP differentials have returned to reasonable levels in recent trading cycles, it is more economical to request incremental term barrels from Aramco and ADNOC, rather than seeking completely separate spot cargoes from US or Southeast Asian suppliers, according to feedstock managers at Japanese refiners.

Light sour Murban crude from the UAE was Japan's preferred crude grade in the first quarter, with refiners purchasing 543,229 b/d during the first three months, as per METI data. Saudi Arab Extra Light was Japan's second favorite at 428,475 b/d, while refiners collectively imported 374,383 b/d of Arab Light over the same period.

In contrast, Japan's US crude imports in the first three months fell 55% from a year ago to 39,071 b/d.

WTI Midland and WTL are likely to remain Japan's most favored non-Persian Gulf crude grades. Refinery configurations and linear programming models are set up for regular shipments of light sweet US grades, but the overall feedstock economics heavily favor Middle Eastern sour crude at present, according to feedstock managers at two refiners, including ENEOS.

At least five major Japanese, South Korean, and Thai refiners have indicated that their regular US crude suppliers have been offering extra cargoes due to decreased interest from Chinese traders in WTI Midland in recent weeks.

However, refinery and trading sources have noted that they have not yet seen any significant improvement in WTI Midland offer prices, likely due to strong demand from Indian refiners for US crude this year.

India's Bharat Petroleum Corp. Ltd. secured a short-term supply contract to procure 1 million barrels/month of WTI Midland crude starting in the third quarter. The South Asian refiner indicated that it may evaluate cracking economics to purchase additional cargoes from the spot market, Platts reported previously.