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Analysis: Japanese utilities hunt for oil to meet robust winter power demand amid faltering LNG stocks

Highlights

ENEOS sees fuel oil demand significantly above supply contracts

Chugoku Electric moving to import fuel oil

Kansai Electric procuring crude oil from abroad

Tokyo — Faltering LNG stocks will likely prompt Japanese power utilities to actively chase for oil in a desperate attempt to keep up with robust domestic winter electricity demand, though local refiners struggling to produce enough burning fuels could lead to a surge in the country's prompt heavy crude and fuel oil cargo imports.

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The chilling cold has led to fuel oil demand far exceeding the planned supply volumes of the country's largest refiner ENEOS, a company official told S&P Global Platts, adding that supply constraints and tighter vessel availability meant it has to prioritize supplying to utilities holding supply contracts.

"We have received emergency requests from power utilities for fuel oil supply at a level significantly exceeding our supply plan," the official said. "We need to prioritize our supply for power utilities with supply contracts amid a shortage of coastal vessels."

Severe cold spells and surging power demand are tightening Japan's power supply amid declining LNG stocks and low renewable output, Minister of Economy, Trade and Industry Hiroshi Kajiyama said Jan. 12, with utilities undertaking emergency fuel procurement.

Japan's incremental crude and fuel oil demand for power generation comes at a time when local refiners are maximizing their output of kerosene to meet heating demand.

SUPPLY DIFFICULTIES

One Japanese refiner is finding difficult to increase its output of fuel oil for power generation as it would derail its supply balance of other refined products, a company source said, adding that it also does not have incremental crude oil for refining. Another Japanese refiner is also finding difficult to increase fuel oil production quickly despite of the increased demand for power.

A sharp decline in coastal vessel availability in recent years, following local utilities' shift to gas-fired power generation, is adding another layer of fuel oil supply difficulty, industry sources said.

Japan's Chugoku Electric, for example, has moved to import fuel oil in addition to its domestic procurement amid a sharp decline in its fuel oil and LNG stocks amid strong power demand, a company official said.

Kansai Electric has secured multiple coastal oil tankers from short-term charter and spot deals for its fuel oil procurements, as well as procuring crude oil from abroad as part of measures to respond its tightened power supply-demand balance, a company official said.

OIL PROCUREMENTS

Japanese power utilities used to take heavy sweet Indonesian crude grades such as Minas, Cinta and Duri for power generation.

There has been a sharp increase in spot heavy sweet crude purchase inquiries from Japanese utilities around Southeast Asia in the past few days, according to a fuel oil and crude oil trading source at a Japanese integrated trading firm with close knowledge of the matter.

However, the source noted that Japanese power utilities will likely struggle to find any heavy sweet crude cargoes available for second half January shipments in Southeast Asia and were better off looking for fuel oil cargoes from Singapore for prompt imports.

"They [power utilities] are in serious trouble for prompt deliveries, which can be covered only by domestic supply. If end-February delivery is acceptable, they can import timing-wise," a Japanese bunker trader said.

"Lots of berths in Japanese oil power plants are not suitable to accommodate MR tankers, or even SR tankers. And for high sulfur fuel oil, most likely Japan is importing from South Korea, but South Korea is also experiencing supply tightness."

The sharp increase in low sulfur fuel oil demand from the power companies has significantly limited fuel supply for the shipping sector, widening the price spread between LSFO and HSFO in recent trading sessions in Singapore.

The spread between the FOB Singapore marine fuel 0.5% assessment and the FOB Singapore 380 CST high sulfur fuel oil assessment hit a 10-month high Jan. 14 at $104.65/mt. The spread, which was last higher at $114.20/mt on March 13, 2020, has been rising since H2 December -- an uptrend that was very much in line with Platts LNG benchmark JKM rising to record high of $32.494/MMBtu Jan. 12.