The pandemic has pummeled Japan's oil demand and led to some dramatic drops in its crude imports and refinery runs. The onset of winter and subsequent rise in demand for heating oil has offset some of that collapse, but the road ahead continues to look uncertain. While crude imports are expected to pick up in the near term, sustainability of that trend very much depends on the severity of COVID-19. What is looking certain however is that Japanese refiners will continue to import refined products as refining economics favor imports and run rates remain low.
The road ahead for Japan's crude and refined product imports
MRIGANKA JAIPURIYAR: Japan's oil demand, like most other countries this year, has been completely pummeled by the coronavirus pandemic. Refinery rates have been slashed. Refined products demand has fallen, and crude imports have fallen to their lowest levels in more than five decades. An interesting trend this year has been that Japan has started importing refined products to meet some of its domestic demand. As we enter 2021, will these trends continue?
Welcome to this episode of S&P Global Platts Oil Markets podcast. My name is Mriganka Jaipuriyar and I am the Head of News at Platts for Asia. Joining me today are Takeo Kumagai, a senior editor in the Platts Asia market insight team, along with Daisuke Shibata, editor in the Japan Domestic Oil Products team. Together, we will take you through some interesting developments in the Japan crude and refined products imports markets, and Takeo and Daisuke will share their expertise on the outlook for 2021.
Takeo could you give us some background on what the trend has been like in Japan's crude and refined products imports so far this year?
TAKEO KUMAGAI: Sure, Mriganka. Japan's crude imports fell sharper from April, around the time when the country was hit by the first peak of the coronavirus pandemic, which had led the country to impose nationwide state of emergency measures until the end of May. The state of emergency measures slashed Japan's domestic demand for transport fuels such as gasoline, gasoil and jet fuel, which subsequently declined the country's monthly crude imports to the lowest level in more than half a century in recent months.
Japan's crude imports retreated, however, in September to just a little over 2 million b/d, the lowest for the month in 53 years after having risen during the country's summer holidays in August.
Against a backdrop of slashed refinery runs and crude imports since April, Japan has imported refined products more actively, with the country becoming a net gasoline importer for the sixth straight month as of September. This is partly because of reducing gasoline exports as a result of the run cuts.
In September, Japan's gasoline imported about 38,000 b/d, which accounted for about 4% of the country's domestic gasoline demand of around 850,000 b/d. This means the import barrels still account for a relatively small amount of the domestic demand.
MRIGANKA JAIPURIYAR: But we are seeing change in that trend. We have seen an uptick in crude imports and oil product demand. Could you shed some light on that? What is driving the change and is it a long-term trend?
TAKEO KUMAGAI: Yes, Mriganka, we are starting to see a turnaround in Japan's crude imports and refinery runs from November as local refiners are raising their crude throughput to meet the country's winter heating demand season for kerosene.
Japan's run rates rose to 74% of capacity in the week ended Nov. 21 after reaching 72% in the previous week, which was the highest level in 13 weeks.
The country's increased refinery runs comes as its kerosene demand picked up earlier than usual in October as a result of lowered temperatures in the month. The kerosene demand is also seen supported by the cold weather outlook during the country's peak heating demand season over December to February.
We recently reported that Japan's crude oil imports are expected to rise to a seven-month high in November as local refiners have boosted their crude procurement from the Middle East in preparation for the country's winter heating demand.
S&P Global Platts Analytics also forecasts Japanese refiners to process 2.5 million b/d of crude oil on average in November, and processing more in December to 2.65 million b/d, and boosting further to 2.8 million b/d in January 2021.
It's also important to note that the bulk of Japan's incremental crude demand is from the Middle East, where it actually sources roughly 90% of its requirements. We understand that this has been mostly fulfilled for meeting the country's peak heating demand over December-February, which means any uptick in prompt demand can be sourced from Russia's Far East.
MRIGANKA JAIPURIYAR: Thanks, Takeo! Given that there's an uptick in kerosene and heating oil demand, Daisuke, could I turn to you get some sort of an outlook for Japan's refinery runs moving forward?
DAISUKE SHIBATA: We recently heard from the PAJ President TsutomuSugimori during a press conference when he said that Japanese refiners' operations are becoming more normal as a result of healthy kerosene demand, coupled with the jet fuel market having recovered to about 40%-50% of its year-ago level as domestic flights resume.
The move came as a gradual recovery in the domestic jet fuel market has allowed an increase in refining rates after demand in the summer dropped to around 20%-30% of its level a year earlier.
Sugimori, however, said Japan's demand for gasoline might fall over December-January because of the current resurgence of the COVID-19.
Citing the precedent of Japan's refining operations being reduced in the summer because of plummeting jet fuel demand, Sugimori also said refiners might have to introduce similar moves in the spring after the end of the kerosene demand season.
MRIGANKA JAIPURIYAR: So it clearly seems like this uptick in demand and run rates is probably going to taper off by the end of the first quarter next year. So Takeo, what does this mean for Japan's crude imports for 2021? Are we expecting them to stay at low levels or are we going to see some sustained recovery in crude imports going forward?
TAKEO KUMAGAI: Yes, Mriganka.We just heard from an executive from Japan's largest refiner ENEOS during an online press briefing that Japan's year-on-year crude imports are set to remain low in 2021 as the coronavirus-led jet fuel demand slump will likely continue to weigh on the country's appetite for refining.
It was also interesting to hear from ENEOS, noting that it will likely focus on procuring crude from the Middle East next year because of its relatively shorter voyage time compared to other markets such as the US. This is because this would give the company more flexibility to respond to any change in the domestic demand situation. However, ENEOS said that the company was yet to decide its term policy for 2021.
Japan's crude imports from the Middle East accounted for 90.5% of the total crude imports in September. The share of crude imports from the Middle East rose to 95.2% over June and July, the highest since records began in 1950 as the country's monthly imports tumbled to the lowest level for the month in more than half a century, with reduced imports from Russia, and Americas among others.
MRIGANKA JAIPURIYAR: Thanks, Takeo. Just talking about one of the interesting trends that I mentioned earlier in Japan this year has been an uptick in Japan's refined product imports. Now that trend is of course driven by refining economics. Now Daisuke, do you expect this trend to continue next year? What is the outlook for Japan's oil products imports next year?
DAISUKE SHIBATA: Japan's oil products import will likely remain at a high level next year. This year, low refinery run rates and good import economics boosted oil products import by Japanese refiners and traders.
Thanks to a series of refining reorganizations in recent years, Japan's spot oil products market have outperformed overseas for the last 4 years. So since 2017, import has been feasible but export has been less attractive than domestic sales.
In the midst of the coronavirus pandemic, this contrast has become even more apparent. Cracking margins clean products against Platts Dubai crude benchmark remain very low in recent months, while cracking margins for Japan's oil products are relatively high. Taking the gasoline cracks against the Platts Dubai for example, it stood around 15$/b in Japan most recently, while it stood in a $1-2/b range in Singapore.
The widened price spread between Japan and Singapore are making difficult for local refiners to boost their refinery runs and export clean products such as gasoline next year as plummeting jet fuel demand will cap an increase in refinery runs in Japan. The low refinery runs expectations will also likely support Japan's active imports of clean products next year.
MRIGANKA JAIPURIYAR: Thank you Takeo and Daisuke for your insights. Just to wrap up, heating oil demand is currently supporting overall refinery runs and crude imports in Japan, but this trend may not continue. I think like in the wider oil market, it is the pandemic, and course of the pandemic, which will eventually decide when markets will recovery to pre-coronavirus times. And Japan's oil product imports will clearly continue into next year. Japan will continue importing refined products, because of refining economics, and also because Japanese refiners will in all likelihood lower their run rates when the winter demand season is over.
Thank you for listening. For more news and insights, do visit spglobal.com/platts. We will see you again next month. Thank you.