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Analysis: Japan's COVID-19 emergency to halt gasoline recovery, but boost kerosene demand

Highlights

Gasoline demand seen dropping 10% during state of emergency: refiner

Gasoline demand slumps to 35-year low in May 2020 after emergency measures

Weak domestic demand may support gasoline exports

Tokyo — The declaration of a state of emergency by Japan is expected to cast dark clouds over the country's gasoline demand, cutting short the prevailing recovery after a long period of gloom. But the same cannot be said for its kerosene consumption as people will have to remain indoors and fight this winter's biting cold.

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The imposition of another COVID-19 related state of emergency until Feb. 7, the first in 32 weeks, will come at a time when the country's demand for refined products is on the course of a gradual recovery from levels not seen in decades, as the pandemic had taken a toll on consumption.

The month-long state of emergency, which was declared by Prime Minister Yoshihide Suga on Jan. 7, is imposed on Tokyo and its adjacent prefectures of Kanagawa, Saitama and Chiba, accounting for roughly 30% of the country's population.

"The imposition of a state of emergency will dampen gasoline demand as people are urged to stay home to prevent the spread of the coronavirus. While the localized measures will have less impact on the economy than the nationwide state of emergency last year, there is a risk of the economy slowing after its recent recovery, with gasoil and jet demand likely remaining the weakest components of barrel demand," JY Lim, oil market adviser at S&P Global Platts Analytics, said.

"In contrast, kerosene demand may get some support from colder winter weather, with people boosting heating demand to work from home," Lim said.

Hitting gasoline

Japan's gasoline demand plunged 22.4% from a year ago to 628,693 b/d in May, the lowest monthly level in 35 years, according to the Ministry of Economy, Trade and Industry data, as COVID-19 restrictions meant activities were severely curtailed, not excluding the Golden Week national holidays over late April to early May.

Gasoline was among the hardest hit refined product during the last state of emergency restrictions over April 7-May 25 as the public refrained from traveling for leisure and business, but demand has been gradually recovering in recent months.

With this latest state of emergency, Japanese market sources expect the restrictive measures to drag domestic gasoline demand even lower.

"In addition to ample domestic [gasoline] stocks, the [gasoline] supply is getting [in] surplus because of increased refinery runs, coupled with the approach of the state of emergency," a Tokyo-based trader said. "We expect gasoline demand to deteriorate further because of the state of emergency declaration, and do not expect it to recover until the lifting of the declaration as we are in the midst of [low] demand season."

A Japanese refiner expects its domestic gasoline demand to drop 10% year on year during the state of emergency restrictions and fall 3% from December because the latest measures apply to Tokyo and three prefectures, a company source said.

Increasing exports

As these new restrictions are bearish for the domestic consumption of gasoline, industry sources are keeping a close watch for any increase in Japan's gasoline exports.

The country's gasoline exports surged in recent weeks on the back of an increase in refinery runs to around 80% as the country readied itself for the winter kerosene heating demand.

Japan's gasoline exports surged 79.7% to 2.26 million barrels in the four weeks ended Jan. 2, according to Platts calculations based on the Petroleum Association of Japan data.

"Japanese refiners have raised their run rates and we are seeing some resumption of gasoline export barrels [from Japan]," one Singapore-based source said.

Heating demand

The latest state of emergency declaration has also led market observers to expect a surge in kerosene demand, industry sources said. In light of the ongoing cold spell, Japan's estimated kerosene shipments to the domestic market surged 55.7% to 12.40 million barrels in the four weeks ended Jan. 2, which was also up 7.5% from a year ago, Platts calculations based on PAJ data showed.

"Given the lower-than-average temperatures in Japan, we can say that kerosene demand is still quite bullish for now. If and when the state of emergency is declared, people will have little choice but to stay at home more, and hence kerosene consumption is expected to rise," a market source with a South Korean refiner said.

"If the [Japanese kerosene] inventory is seen declining at a rapid rate, there is a chance that the Japanese will seek to import prompt kerosene cargoes, but they may have difficulty securing prompt barrels now as [South] Korea is also seeing higher domestic consumption due to lower temperatures".

South Korea is the main kerosene exporter to Japan.

The latest month-long weather forecast released Jan. 7 by the Japan Meteorological Agency showed that Japan's Kanto/Koshin region, including Tokyo in the east, is forecast to experience temperatures above the 30-year average, while Tohoku and Hokkaido in the north are projected to experience below average temperatures over Jan. 9-Feb. 8.

The latest JMA forecast also notes that Japan will experience below 30-year average temperatures across the country at least until Jan. 15.