Japan seen facing 13 mil barrels of crude surplus over demand in June

Japan could see roughly 13 million barrels of surplus crude supply over domestic demand in June amid plummeting petroleum consumption in the midst of the coronavirus pandemic, pressuring refiners to delay some of their term supply after June, according to S&P Global Platts calculations based on industry information.

At least one Japanese refiner confirmed it is considering delaying some of its term crude cargoes loading in June after making adjustments in its spot procurements. Another Japanese refiner is adjusting its supply and demand balance through cutting back its spot crude procurements for June, coupled with reduced term supply from an OPEC producer, following the recent output cut announced by producing countries, a company source said.

The Platts calculations are based on industry information including from Takashi Tsukioka, chairman of Idemitsu Kosan, the second largest Japanese refiner, who said the refiner expects domestic oil products demand to drop by around 20% from a year ago over April-June.

Japan’s surplus crude could amount to around 440,000 b/d in June based on the country’s import a year earlier even if local refiners were taking less monthly term supply volumes from a combination of supply cuts and contractual tolerance, in addition to reducing spot procurements because of plummeting domestic oil demand, according to Platts calculations.

The calculations are based on the assumption that Japanese refiners will cut back 5-15% term supply from some of their key suppliers in the Middle East as well as scaling back spot crude procurements for June.

“With tanks having been filled up, we are getting left with an option to cut refinery runs as it is increasingly getting difficult to purchase crude. We expect to see such actions, including for term contracts, as delaying loading schedules after June,” Tsukioka told a news conference on April 17 as the president of the Petroleum Association of Japan.

“While [Japanese] refiners are lifting their term contractual volumes by May, there is a chance that the refiners might not be able to lift the term contractual volumes after June. The refiners would consider their nominations for June [loading] in May, depending on their sales and tank capacity,” he added.Japan’s crude oil imports total about 3 million b/d with roughly 90% from the Middle East, of which 70%-80% of the supplies are based on term contracts.

Dilemma
Japan’s dilemma — which may well be reflected across other Asian countries — will impact both price and volume of Middle East barrels flowing eastward over June.Scaled back import requirements from major Middle East customers such as Japan would push the goalpost of supply/demand equilibrium further out, despite OPEC+ producers cutting combined crude production by 9.7 million b/d over June.

The incentive of cheap crude due to price cuts expected from Saudi Aramco and other Persian Gulf producers is unlikely to encourage Japanese refiners to maximize their term or spot purchases due to logistical limitations, putting further downward pressure on prices for the next cycle.

The June Dubai cash/futures structure has averaged minus $9.57/b so far this month, a steep drop from minus $3.11/b averaged over March. The structure could decline further as demand for Middle East crude recedes with storage facilities reaching maximum capacity for Japan, as well as other Asian importers of Middle East crude.

Additionally, the cutback in refining rates and lower import requirements are likely to put pressure on product margins, particularly summer season essentials such as gasoline and diesel.

State of emergency
Japanese refiners are expected to see surplus crude supply over the domestic demand at a time when local market participants are expecting to see sharper drops in gasoline demand during the Golden Week national holidays — one of the country’s peak driving seasons — over late-April to early May under the nationwide state of emergency measures in place until May 6.

“We are hearing that [the gasoline demand] will deteriorate further during the Golden Week because there will be no demand for commute,” said a local trader adding that this will be a further blow to this year’s peak driving season as the leisure demand cannot be expected in the midst of the state of emergency.

Japanese refiners are also shutting more refining capacity than previously expected for maintenance works, totaling 668,000 b/d, or 19% of the country’s total refining capacity of 3.519 million b/d at its peak in June, according to Platts calculations.

Japan’s refinery outage currently stands at 337,000 b/d, with JXTG Nippon Oil & Energy’s 235,000 b/d Kawasaki refinery and Cosmo Oil’s 102,000 b/d No. 2 crude distillation unit at the 177,000 b/d Chiba refinery in Tokyo Bay shut for maintenance.