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Japan's retail gasoline nears subsidy limit after hitting five-week high

Highlights

Retail gasoline price reaches Yen 166.5/l

Japanese government to subsidize refiners at Yen 170/l

Japan's RON 90 gasoline was just Yen 3.5/l shy of the government's Yen 170/l subsidy threshold for refiners after the average weekly retail price surged to a five-week high of Yen 166.5/l Jan. 11, according to the latest data from the Ministry of Economy, Trade and Industry (METI).

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The Japanese government in November agreed to offer refiners maximum subsidy of Yen 5/l to rein in rising retail prices of oil products, including gasoline, kerosene, and gasoil.

Gasoline climbed to a more than seven-year high of Yen 169/l in November, tracking the global oil prices amid tight supply. Retail gasoline prices have cooled since to settle at Yen 164.7/l in the first week of January.

The average retail kerosene price also reached a five-week high of Yen 107.4/l Jan. 11, up Yen 1.2/l from a week ago, according to the METI. The average gasoil price rose Yen 1.8/l week on week to Yen 146.4/l, during the same period.

Japanese refiners reduced wholesale prices for oil products by as much as Yen 6,500/kl in December. The wholesale prices rose by Yen 7,000/kl in January on tight supply concerns amid surging COVID-19 infections.

Japanese refiners are likely to increase oil products' selling price by another Yen 1,500-2,000/kl in the week starting Jan. 17, as global crude prices gain, pushing the retail gasoline prices closer to the Yen 170/l subsidy limit, according to market participants.

"Retail prices will likely decrease if the policy is invoked, as subsidized refiners are supposed to decrease their wholesale prices to retailers", said Akio Ichihara, a former METI official and president of the Oil Information Center, in charge of the retail price research commissioned by the METI. "But it's hard to guess how much retail prices would actually fall and how it will affect the economy."

"The scheme will be implemented under the budget of the current fiscal year which ends this March. It's up to the METI whether it keeps this policy [thereafter]", Ichihara said.

Japan's prime minister Fumio Kishida in November declared the country's intention to sell some of the state's oil reserves to cool rapidly rising oil prices, in line with the Biden administration's announcement to release 50 million barrels of US oil reserves.

The Japanese government said in December it will sell by auction 100,000/kl, or 628,980 barrels, of its crude oil reserves, as part of the US-led efforts. Traders expect the move to have little effect on the domestic oil price.

The METI has said it will hold the auction Feb. 9 to deliver the supply from its Shibushi state oil reserve tank in Kagoshima, south of Japan, to refiners or trading houses after March 20.