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Asia's SPR release lacks tenacity as some seek other options to tame oil inflation

Highlights

Asia's SPR release accounts for only small portion of their state inventories

Seoul, Tokyo aim to tame inflation via lower fuel taxes, government subsidies

OPEC+ raising production at tepid rate but not cutting supply

Asia's major oil consuming nations have decided to release crude oil from their respective strategic petroleum reserves in coordinated efforts with the US to ease the price burden on Asia Pacific consumers, but some of the top Asian economies believe there are more effective ways to tame consumer inflation such as lowering fuel taxes.

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India, China, South Korea and Japan said they plan to release their state oil reserves after the White House announced Nov. 23 that the US will release 50 million barrels from its SPR early next year.

India has agreed to release 5 million barrels of crude oil from its SPR, while China is poised to release more crude from state reserves amid expectations that the second set of auctions could potentially include at least 7 million barrels of medium sweet ESPO blend crude.

South Korea will release crude from its SPR, with a source at the Ministry of Trade, Industry and Energy indicating that Seoul could offer about 3.8 million barrels.

Japan will also sell part of the country's national petroleum reserves. Tokyo's sales of national petroleum reserves will be made by advancing its planned sales of crude oil grades for replacement in the national petroleum reserves without violating the country's petroleum stockpiling law. The sales could amount to around "a couple of hundred thousand kiloliters," according to Minister of Economy, Trade and Industry Koichi Hagiuda.

However, the volume of the major Asian economies' SPR releases disappointed global market participants, while New Delhi, Seoul, Beijing and Tokyo and have all failed to provide any timeline for their crude releases so far.

"Asia's SPR release was below expectations and it is [even understood to be] an exchange deal... buyers need to return the oil in 2022 to 2024," a crude trader based in Singapore said.

The combined total of the four nations' crude releases account for only a tiny portion of their SPRs. Many Asian nations are not exactly keen on fully utilizing national reserves, with state-run oil companies and major private refiners in Northeast and Southeast Asia indicating that the true purpose of the SPR is for critical events such as drastic supply disruptions due to major geopolitical events like war, not for commercial reasons like high prices.

Asian crude oil consumers

In addition, quality concerns could limit demand from Japanese refiners as a large quantity of crude oil in Japan's SPR has been sealed in the same tanks for more than decades, according to refinery and trading sources with close knowledge of the matter.

Tax cuts, subsidies

Authorities in South Korea and Japan are seeking to implement more constructive ways to tackle the rising consumer inflation and help ease the burden on consumers struggling with high retail fuel prices.

Earlier this month, South Korea's Ministry of Economy and Finance decided to lower taxes on auto fuels by as much as 20% for six months from November, as part of efforts to ease rise in pump prices.

In Japan, the Ministry of Economy, Trade and Industry decided to provide subsidies to curb increases in retail prices of gasoline, kerosene, gasoil and fuel oil from the end of December to end of March in an effort to aid domestic transportation fuel consumers.

Tax cuts and subsidies can effectively and promptly bring prices down for consumers, but it takes months for the big international benchmark price moves to be fully reflected in daily life for the average citizen and retail gas stations, according to middle distillate marketers at Japan's Cosmo Oil and South Korea's S-Oil Corp.

OPEC+ hike, not cut

Oil industry and refinery sources across Asia indicated that although OPEC and its allies are adopting a cautious approach in the group's production strategy, the producers are still raising production, albeit at a slower-than-desired rate.

OPEC and its allies are standing firm on increasing crude output quotas by a modest 400,000 b/d each month. In contrast, nine major Asian refiners surveyed by S&P Global Platts -- including PTT, BPCL, ENEOS, SK Innovation, Petronas and PetroChina -- indicated the producer group should ideally raise supply by at least 800,000 b/d as current oil prices appear too high and consumer sentiment is hurt by prices at these levels.

However, the current market fundamentals are far from what Asian oil and refining industry would classify as a 'state emergency' as the OPEC+ is still looking to raise output and the group is not actually reducing supply, according to trading managers and plant operation managers at the major Asian refiners surveyed.