Tokyo — Japan's demand for gasoline and gasoil has recovered faster than expected following the lifting of the state of emergency restrictions, but refiners may not be able to ramp up its refinery run rate to meet demand in July mainly due to the slow revival in jet fuel demand.
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This means that Japan will look overseas to bring in cargoes to plug any shortfall arising from the low refinery runs at home.
Following the lifting of domestic travel restrictions on June 19, Japanese traders expected to see a further recovery in gasoline demand in July, the start of the country's summer driving season.
"We are hearing that refiners are reducing [gasoline] supply from their lowered [refinery] run rates, although demand will continue to recover," a trader based in Japan said.
Japan's June gasoline demand is estimated at 3.59 million kl, or 752,679 b/d, down 8% year on year, while gasoil is estimated to have slipped 6% year on year to 2.63 million kl, or 551,406 b/d, the country's largest refiner ENEOS said June 29.
The estimated motor fuel demand in June marked a significant recovery from May, as the government had on May 25 lifted restrictions related to the curtailment of the coronavirus pandemic in Japan. Gasoline demand in May was estimated to have plunged 25% year on year, while gasoil was estimated to have dropped 11% from a year ago, according to ENEOS.
On June 26, Japan's domestic gasoline rack prices in Chiba, Tokyo Bay, stood at Yen 39,900/kiloliter ($59.31/b), up 42% from May 25 when the restrictions were lifted, S&P Global Platts data showed.
The June estimates, however, would still put gasoline demand at the lowest for the month since 1989, when sales stood at 3.34 million kl, and gasoil at the lowest for the month since 2009, when sales were at 2.62 million kl, the Ministry of Economy, Trade and Industry data showed.
Japanese refiners are likely to maximize gasoline and gasoil output amid the demand recovery for these motor fuels, but sluggish demand for jet fuel will continue to constrain refining operations, the president of the Petroleum Association of Japan, Tsutomu Sugimori, said on June 18.
"With jet fuel having fallen to just 20%-30% [of the year ago demand], we think we will need to undertake such difficult operations as gradually maximizing gasoline, gasoil [production], while minimizing jet fuel and kerosene distillates," Sugimori said. "We see gasoline and gasoil demand making a relatively favorable recovery, but we have no visibility for jet fuel."
Given the imbalance in the pace of demand recovery for clean products, Japanese refiners might minimize its refinery runs based on kerosene/jet fuel distillates and opt to import instead, Sugimori added, referring to the availability of ample and cheap jet fuel globally.
"There is no incentive for refiners to end up holding unwanted jet," a Singapore-based refining source said.
In addition, cheaper jet fuel may entice refiners to minimize jet fuel/kerosene and maximize gasoil output. Platts data showed that FOB Singapore jet fuel averaged $28.89/b in May, marking a $53.64/b, or 64.57%, plunge from May 2019.
ENEOS, for instance, said on June 25 it has delayed the planned restart of two crude distillation units at its 235,000 b/d Kawasaki refinery in Tokyo Bay to late July.
In a sign that Japan is well on its recovery from the coronavirus-related restrictions, ENEOS bought at least one MR-sized gasoline cargo from Singapore for June, Platts reported on June 18.
Japan's imports will provide more support to the Asian gasoline market, which has seen regional demand recover steadily in June, industry sources said.
The Philippines in particular, who like Japan consumes non-oxygenated cargoes, is also seeing a rise in demand amid reduced refinery run rates and leads the import recovery with a consistent inflow of around one MR tanker, or 35,000 mt, per week in June.
"Asian demand for non-oxygenated barrels is recovering well," one Singapore-based source noted. "A lot of the demand improvements have been focused there."
Reflecting the overall recovery in physical gasoline, the FOB Singapore 92 RON gasoline crack against front-month ICE Brent crude futures averaged $3.64/b over June 22-26, up slightly from the previous week's average of $3.57/b, Platts data showed.
In the gasoil market, refinery run cuts and maintenance have tightened supply balances in Asia, with the crimp in supply underpinning the recent strength in the market.
"[The] 10 ppm [sulfur gasoil grade] is still going strong... mainly [due to] supply-driven [factors]," a refinery source said.
At the Asian close on June 26, the cash differential for the benchmark Asian 10 ppm sulfur gasoil was assessed at plus 92 cents/b to the Mean of Platts Singapore gasoil assessments, FOB Singapore. Just a month ago, the same grade had been assessed at a discount of 60 cents/b to MOPS gasoil assessments, FOB Singapore.