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Japan set to lift refinery runs as colder-than-average winter calls for ample kerosene output

Highlights

Dec-Feb temperatures set to fall below 30-year average

S Korean kerosene suppliers aim to boost sales to Japan

Higher run rates may lead to lower gasoline imports

Tokyo — Japanese refiners are poised to boost their run rates in the fourth quarter to increase production of heating fuel as the country braces for a colder-than-usual winter this year, while South Korean kerosene suppliers are getting ready to fill any shortage in heating oil supply in Japan.

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Japan's refinery runs will "likely recover from current levels during winter" because refiners will increase kerosene production to meet heating demand, the Petroleum Association of Japan President Tsutomu Sugimori said Sept. 17.

Japan's refinery runs have declined sharply in recent months because of plummeting jet fuel demand amid border restrictions in light of the coronavirus pandemic.

However, runs are expected to increase in Q4 as heating demand for kerosene, which has similar specifications to jet fuel, picks up amid the colder-than-usual temperature outlook over December-February.

Amid increasing refinery runs in the coming months, "there is not so much element to increase [kerosene] imports because we believe we should be able to adjust [the demand] from our production," said a source with a Japanese refiner on Oct. 2.

"Although there would be some necessary imports [of kerosene] as usual, any further incremental imports should depend on the severity of winter weather," he added.

Ten out of Japan's 12 regions are forecast to have temperatures below the 30-year average over December-February, during the country's peak winter heating demand season, the Japan Meteorological Agency said in its winter weather forecast Sept. 25.

Japan's average refinery run rates have recovered to 70% as of Sept. 26, after having retreated in recent weeks to the 60% range following the peak summer holiday season in mid-August, according to PAJ data.

South Korean offer

Meanwhile, South Korean refiners have said they are seeking to use the Japanese market as an outlet to offset their jet fuel/kerosene inventory pressures.

In South Korea, kerosene accounts for very little of the country's overall heating energy source during winter. Households and the commercial sector in the country rely mostly on gas and electricity for winter heating.

In addition, the country has been grappling with rising stocks of unwanted aviation fuel as jet fuel consumption tumbled 41% on the year to 14.94 million barrels for the first eight months, with local airlines having suspended most flights on international routes since March.

South Korea's heating fuel exports to Japan typically spike during the November-February cold season and the cyclical trend will likely remain intact. Kerosene exports to Japan averaged just over 6,600 b/d in Q3, but they could reach around 8,700 b/d in Q4 and 22,500 b/d in Q1 2021, according to fuel marketing sources at SK Innovation, S-Oil Corp., GS Caltex and Hyundai Oilbank surveyed by S&P Global Platts in the week of Sept. 27.

Slower gasoline imports

Meanwhile, the expected boost in Q4 refinery run rates and higher production of light and middle distillate products mean that Japan will likely turn more self-sufficient in motor fuels, including gasoline.

"Imports [of gasoline] will be reduced [on the back of higher refinery runs]," the Japanese refiner said Oct. 2. "The domestic [gasoline] supply and demand will be moving toward balancing."

Japan was a net importer of gasoline for the fifth consecutive month as of August due to low refinery run rates and a month-on-month recovery in domestic consumption.

Japan imported an average of 85,755 b/d of gasoline in August, up 27% from a year earlier, while it exported only 18,888 b/d of gasoline, according to the Ministry of Economy, Trade and Industry data. The increased gasoline imports came on the back of a 27% year-on-year drop in the August crude throughput to 2.348 million b/d.