Economics takes precedence in Japan’s crude buying strategy: Fuel for Thought
OREANDA-NEWS. September 06, 2016. Skimming along the surface of Japan’s crude import numbers gives an impression that the pendulum has swung back in favor of Middle Eastern crudes.
But a deeper dive into the data tells a more subtle story—that Japan has become more flexible its crude buying. Because of the length in crude markets, Japanese buyers are finding it possible to take additional contract volumes or negotiate with term suppliers for additional supply. In addition, they are buying arbitrage spot cargoes from outside the region.
Before shale production took off in the US, Japan was more focused on the stability of supply and maintaining relationships with suppliers rather than optimizing the economics of their refining sector.
Now refiners’ linear program models are showing to buy Dubai-linked crudes, supporting increased imports from the Middle East.
Japan’s Mideast crude imports shot up in recent months as the country’s Iranian imports recovered to a pre-sanction level of 307,691 b/d in May and remained close to 300,000 b/d in June.
This followed imports from Saudi Arabia, which surged to a 10-year high of 1.42 million b/d in April.
The increase in Iranian crude imports raised the overall Mideast share of Japan’s crude imports to an average of 86.7% over January-June, up from 82.2% from a year ago, according to S&P Global Platts calculations based on the Ministry of Economy, Trade and Industry data.
Indeed the greater Mideast market share provides a sharp contrast from last year when Middle Eastern crudes were 81.8% of Japan’s crude import basket. That was down slightly from 83% in 2014 as the country stepped up buying arbitrage cargoes from across the globe, including from Mexico and Kazakhstan, while becoming more selective about their procurements within the Middle East.
The increased crude imports from the Middle East this year are also supported by a pricing trend. The second-month Brent-Dubai Exchange of Futures for Swaps averaged \\$3.33/b through the first six months of this year, compared to \\$1.71/b through 2015, according to Platts data.
A wider EFS leads to Brent related crudes being less competitive compared to Dubai related crudes.
The greater Mideast imports meant a slashing of Russian imports as local refiners have passed up their previously favorite ESPO crude. Russian crude supplies to Japan dropped 27.9% year on year to 216,084 b/d in the six months to June 30.
Japan’s appetite for middle-distillate rich ESPO crude, however, could come back whenever economics are improved as the grade still has an advantage in its 2-3-day short haul from Kozmino in Russia’s Far East, compared with around a 20-25 day voyage from the Middle East.
Indonesia also lost market share due to a sharp drop in demand for ultra-low sulfur heavy sweet crudes used for direct-burning for thermal power generation.
The country’s Indonesian crude imports dropped 29.2% year on year to 57,714 b/d in the first half of the year.
Variety within the Middle East
Japan is also getting a more varied supply from the Middle East. For example, Iraq is supplying cheaper spot barrels compared to other Middle Eastern producers and as a result exports to Japan more than doubled to 82,445 b/d.
Imports from Kuwait slid 7.3% year on year to 256,463 b/d in the January-June period. Japan’s largest supplier, Saudi Arabia, also showed a 6.9% increase in exports to Japan to 1.2 million b/d in the six-month period.
Mexican crude sales to Japan, meanwhile, surged 70.6% year on year to 57,576 b/d in H1 2016—a move that stems partly from the supplier pricing its crude using Dubai and Oman benchmarks for Asia, which makes it easier for Japanese buyers.
This is unlike a majority of other Latin American crudes, which are indexed to WTI.
Mexican crude is also shipped on Suezmax tankers from the Salina Cruz oil terminal on Mexico’s Pacific Coast, which the Japanese helped build, incidentally, back in the 1980s.
The Pacific Coast port also provides comparative economics to Mideast supplies on VLCCs as both cargoes take around 20 days for a voyage to Japan.
Looking ahead, Japan’s Mideast crude imports will likely hover at high levels from its preferred suppliers as those producers have kept their OSP differentials competitive in order to maintain market share going into the winter demand season.
Japan has entered a new phase for crude procurements. It is now seeking a balance between more economic barrels from the Middle East and beyond, while making further efforts to cement already strong ties with top suppliers such as Saudi Arabia and Abu Dhabi.