Oil traders may hold more stockpiles than Japan needs

Oil traders and companies holding stocks of crude and fuel oil ready to cash in on a surge in demand from Japan's power plants may have bought more than needed.


Japan's oil demand for power consumption has shown little of the expected rise. If traders decide to give up the wait and sell elsewhere, prices of the stockpiled sweet crude grades from Indonesia, Vietnam and Sudan and fuel oil could slide in the weeks ahead.
Traders bought crude and fuel oil after the massive March 11 earthquake and tsunami, on the expectation Japan would burn more oil at power plants as it looked to plug the gap in electricity supply due to shutdowns at nuclear reactors hit by the disaster.
"The system in Japan is already geared to take care of the situation without too much additional burden," Fereidun Fesharaki, chairman of FACTS Global Energy said.
"I don't see a big rush to buy new volumes."
Until May, demand had been tepid and there was little sign of the need for an extra 200,000 barrels per day the IEA estimated.
In May, Japan's main 10 utilities doubled the amount of crude it burned from the same month last year while fuel oil consumption jumped by 50 percent.
News that Japan may shut all its 54 nuclear reactors by April as public concern prevents restarts from maintenance could also force the country to increase oil imports for power plants.
The possibility, however, that Japan demand estimates have been overdone are already weighing on prices. Vietnamese Su Tu Den , a grade that is used for direct-burning in Japan, was sold at $3-$5 a barrel above the Minas formula for July loading, down from a record premium of $7.15 a barrel paid for a July-December deal done in April-May.
Bach Ho crude for July was sold at around $6 a barrel above the Minas formula, down from a near $10 a barrel premium for May-loading cargo.
"In the beginning when Fukushima came, there was a big jump in sweet crude prices," Fesharaki said.
"I think they may have jumped a bit too fast. I just don't see the system requiring too much oil."
Estimates of Japan's demand for direct-burning utility fuels, which has so far been lackluster in the aftermath of the March 11 earthquake, are wide, ranging from 150,000 to 250,000 barrels per day (bpd), analysts and industry executives said.
IDLE CAPACITY
Companies and suppliers are still assessing the amount of idle generation capacity fired by fuel oil and crude the nation has following the devastating earthquake and tsunami.
Utilities in the world's third largest oil user are expected to burn 200,000-250,000 bpd of oil in 2011, up 30,000-80,000 bpd from last year, estimates from consultancies PFC Energy and ESAI showed.
"This is quite a large increase, considering that extreme temperatures boosted last year's summer oil burning to already high levels," said Mark Freier, senior analyst, markets and country strategies at PFC Energy.
Since the quake, local refiners have been stocking up residual products, which normally would be sold as high-value blendstock, in anticipation of increased summer demand for electricity and the possibility of insufficient power-generation fuels, traders said.
There is floating storage offshore Malaysia and Japanese traders also have tanks in Singapore, southern and eastern China. At least two Aframaxes are each storing 600,000 barrels of sweet crude, likely Nile Blend, while a light sweet Kutubu cargo is also in storage, traders said.
"Before the crisis, nobody floated much crude. People were more bullish thinking the Japanese would buy more crude for burning and started storing," a trader said.
Crude storers are incurring demurrage costs of around $22,000 a day while a backwardated Brent market may lead to losses as they risk selling at lower prices in the future than the prompt month, traders said.
SWELLING INVENTORIES
Japan's commercial crude inventories soared to a 31-month high while crude throughput fell to a record low in the week to June 4 as demand fell on economic slowdown after the quake.
Fuel oil imports tripled to 476,200 kilolitres (99,840 bpd) in April, data from the Petroleum Association of Japan showed.
In contrast, consumption has fallen and an average of about 400,000 kl of fuel oil was used for burning in power plants in March and April, down from an average of 645,000 kl for January and February and from last year's monthly average of 485,000 kl, according to data from the Federation of Electric Power Companies of Japan.
At the same time, Japanese refiners have increased the yield of the product to over 13 percent by burning heavier crudes, increasing local availability of the fuel, PFC's Freier said.
All these signs point to swelling inventories, sparking concerns that even with higher summer demand the volumes may still prove to be more than required.
A swing factor in the supply-demand jigsaw is Japan's disciplined population and its reaction to the government's austerity measures to limit electricity usage.
Among steps to curb power use during the hot summer months, when air-conditioning causes demand to spike, car and car parts makers will switch days off to weekdays instead of weekends, running factories on Saturdays and Sundays when power demand is lower.
Austerity measures could impact demand, traders said, although it is difficult to forecast how much.
AUSTERITY MEASURES
"I wouldn't be surprised if actual demand even turns out a little lower," than expectations, PFC's Freier said.
To cope with the shortage, Japan has targeted a cut in electricity use by 15 percent in quake-hit regions of Kanto and Tohoku in the north-east for more than two months from July 1.
The best-case scenario for refiners and traders would be that the summer demand is sufficient to soak up all the stocks at a steady pace, but without the need for any desperate buying that may result in a surge in prices, traders said.
"The bottom line is -- fuel oil will never be able to replace the entire capacity that is lost, there is not enough incremental production of 0.3 percent fuel oil available and some of the oil-fired thermal generators are still down," another trader said.
"But the expectation is that summer demand will pick up to a point where it is more than enough to soak up all the LSWR in storage."
Source: Reuters