Huge inventory losses brought on by the plunge in oil prices in the second half of last year prompted Japanese refiners, desperate to eke out margins, to switch away from some of their staple heavy crude imports from the Middle East in favor of spot barrels from Russia and even far-away Mexico.
Japan has been an occasional buyer of spot Latin American grades — whenever the economics makes sense. Russia is different; its crude footprint in Japan has been growing, thanks to the freight advantage and the increasing popularity of its ESPO crude among Japanese refiners.
The spot purchases of Mexican and Russian crudes came in a year the Japanese refiners were also cutting their overall term intake, except from their top two suppliers — Saudi Arabia and the UAE — as the country trimmed 520,000 b/d of refining capacity.
In response to government regulations, Japan’s operational refining capacity shrank to 3.95 million b/d as of March 31, 2014, following complete closure of refineries and scrapping of crude distillation units to increase their residue cracking ratio, which is calculated by dividing a plant’s residue cracking capacity by its crude distillation capacity.
Refiner Cosmo Oil bought at least 2 million barrels of Isthmus from Mexico for loading in December 2014 and February 2015, as it became competitive against similar grades from the Middle East, even after taking the long haul freight into account. Cosmo’s last Isthmus purchase was 2 million barrels over March-May 2014. Its import of 552,880 barrels of Isthmus in March was the first since January 2004.
Isthmus is regarded as a viable replacement for several Middle Eastern medium-sour crudes, including Qatar Marine, Saudi Arab Light and Abu Dhabi’s Upper Zakum. The Mexican grade has an API gravity of about 33 degrees and a sulfur content of 1.5%.
The diversification, though significant, is small. Middle Eastern barrels accounted for 83% of Japan’s total imports of an average 3.44 million b/d in 2014, despite increasing Russian barrels displacing some Oman cargoes.
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Some Japanese refiners took more crude from Russia in the fourth quarter, elevating the producer to third position on the list of top suppliers for that period. Economics favored ESPO as its differentials with Oman crude narrowed during the accelerated price slide toward the end of the year.
Refiners opting to take more ESPO in December were able to resell their term Oman. And the Russian deliveries could be made in the same month as loading. They were exploiting the arbitrage between November prices, when the Oman barrels would have loaded for the 20-day voyage to Japan, and the ESPO parcels next door, which were available at the lower December prices.
Japan’s crude imports from Russia were 18% higher on year in Q4, averaging 330,887 b/d, according to the Ministry of Economy, Trade and Industry data. Of the total, 217,526 b/d was ESPO, up nearly 14% on year. Over the same period, Oman crude imports slumped 74% to a mere 18,187 b/d.
ESPO being rich in middle distillates suited the refiners preparing for the December-February winter heating oil demand season in Japan, when kerosene consumption spikes.
For all of 2014, Russia ended up as Japan’s fourth largest crude supplier, with nearly 12% more exports and up a notch from its position in 2013. Its share of Japanese crude import mix climbed to 8.2% from 6.9% in 2013. At the same time, Oman’s share declined to 1.3% in 2014 from 2.2% a year ago, though the sultanate remained the 8th largest crude supplier to Japan.
As a shrinking domestic market and continued oil price volatility stacks up the challenges for Japanese refiners, they will likely need to become progressively more flexible with their crude procurements.