Japanese refiners consider cutting crude futures purchases for spot market as yen falls

Yen trades near 38-year low against dollar

Spot purchases of US crude increase in May as Saudi consumption falls

Refiners want to increase gasoline exports to earn dollars

Some Japanese refiners are considering reducing their forward crude purchase commitments and adopting a more flexible spot purchasing strategy as the weakening yen erodes their purchasing power, industry sources said.

The Japanese currency briefly hit its lowest intraday level since December 1986, at 161.75 yen per dollar, on July 2. The Asian currency was quoted at 161.43 yen per dollar in the first session in Tokyo on July 4.

The yen has been one of the world’s worst-performing currencies, putting a lot of financial pressure on refiners that typically buy millions of barrels of crude oil on the international market each month, said raw materials and logistics executives at three major Japanese refiners, including Cosmo Oil.

About 95% of Japan’s crude needs come from Middle Eastern suppliers, and more than 60% of Persian Gulf crude supplies are futures contracts. Commodity managers and middle distillate traders at two Japanese refiners said domestic refining and product sales margins were under pressure due to weak purchasing power of raw materials, while inflation is hurting domestic demand for consumer and industrial fuels.

“Obviously, it will not be possible to completely reverse the existing futures contracts, but it is possible to designate the minimum monthly forward lifting volume, and we could consider signing a 15-20% lower forward supply agreement for the next forward period,” said a commodities executive at a major Japanese refiner, declining to be identified due to the sensitivity of the company’s international business strategies.

Japan’s crude imports fell 13.8 percent year-on-year to 2.11 million b/d in May, according to the latest data from the Ministry of Economy, Trade and Industry.

Refiners could improve their economics and overall refining margins by adopting a more spot-based crude supply strategy, refinery feedstock management sources said. Saudi crude imports, all of which were tied to futures contracts, fell 19% from a year earlier to 765,864 b/d in May, while shipments of UAE crude grades including Murban, Das Blend and Upper Zakum fell 8.2% year-on-year to 974,289 b/d last month, according to METI data.

At the same time, Japanese crude imports into the United States, mostly purchased on the spot market, more than tripled to 67,515 b/d in May, from 15,942 b/d a year earlier.

Exports and sales of petroleum products

To recoup some of the dollar outlay on raw material procurement, more cargoes of jet fuel and gasoline could be set aside for exports, but jet fuel would mainly meet domestic needs, said middle distillate marketing executives at two Japanese refiners and an integrated trading company.

Exporting petroleum products would generate revenue and profits in dollars, while sales margins are also much better for overseas shipments than for domestic distribution, a Tokyo-based gasoline distributor said.

“It’s not really ideal to spend expensive dollars to produce something, only to sell the product domestically and earn a weak yen,” the marketer said. Japan exported 57,658 b/d of gasoline in May, more than double the 20,210 b/d it sold overseas a year earlier, according to METI data.

Refiners said they would prioritize domestic airports for jet fuel sales because of the tight supply-demand balance, with logistics constraints and refinery maintenance limiting aviation fuel supply and distribution to regional airports during Japan’s tourism booms.

A shortage of domestic ships and tankers has slowed the distribution of jet fuel from refiners to major airports, while parliamentary legislation that came into force in April to control workers’ overtime has reduced the turnaround rate of domestic fuel deliveries.

Japan is currently experiencing a maintenance spike at its refineries, shutting down nearly a third of the country’s total refining capacity of 3.11 million b/d.

In an apparent effort to address the aviation fuel shortage, Japan’s largest refiner, ENEOS, has bought at least one rare MR-sized cargo of jet fuel for July loading. The jet fuel cargo trade emerged after an ENEOS spokesman said on July 1 that it was considering importing jet fuel as part of measures to ensure stable supplies.

Top 10 Crude Oil Suppliers to Japan in May (Unit: b/d)

Source: Platts