Cushing inventory no longer influence Brent premium

Brent premium to WTI crude oil has narrowed from above $23 per barrel in February to around $10/bbl recently. The narrower premium despite high crude oil inventory levels at Cushing Oklahoma suggests that impact of the crude oil stocks level on prices is declining.

Since West Texas Intermediate crude oil has higher quality than North Sea Brent crude oil, WTI prices were expensive than Brent previously. But ample crude oil supply in North America has pushed up Brent prices more than $10/bbl over WTI regularly since 2011.

Brent premium to WTI had moved between minus $10 and plus $10 before 2011 in step with the increase and decrease of Cushing crude oil inventory.

The correlation coefficient between the Brent premium and the Cushing inventory since 2007 is 0.69, a strong correlation. However, the coefficient after March 2012 becomes -0.27, a slight inverse correlation.

Recent Cushing inventory level reaches to 80% of the regional crude oil storage capacity. Slight change of inventory level seems not to influence on prices significantly under the saturation situation of crude oil stocks.

Reversal of Seaway pipeline is an another factor of the lower correlation between Brent premium and Cushing inventory.

The pipeline has started reversal of crude oil transportation from US Midwest to Mexican Gulf in May last year. About 150,000 barrel per day in the beginning and expanded to 400,000 bpd in January this year, then it is scheduled to add another 450,000 bpd in 1Q 2014. The transport capacity will be 850,000 bpd in total.

The pipeline, however, seems not carrying large volume of crude oil into the Mexican Gulf area now, since the Cushing inventory stays at high level.

Even though the pipeline is not operated under full capacity at moment, it is able to reduce Midwest crude oil stocks immediately if conditions apply. Therefore, crude oil stocks in the US Midwest and Mexican Gulf should be regarded as one unit. Brent premium is not decided only by the Cushing inventory.

Japan hikes LNG dependence on Middle East

Japan's liquefied natural gas imports fell 4.8% on year to 7.74 million tonnes in March, according to the customs data.
The country's LNG imports have decreased on year consecutively after recorded the historical high at 8.23 million tonnes in January. While total imports have shrunk, dependence on the Middle East is rising.

Japanese power utilities have reduced LNG consumption for thermal power compared to the previous year level in the first three months of this year due to users power saving and relatively warm weather.
Electricity supply by Tokyo Electric Power Company during the first 20 days in April was 3.6% lower from a year ago, therefore its LNG consumption in this month is also likely to be less than a year earlier.

 LNG storage capacity in Japan was added more than a million kilometers or about 700,000 tonnes. But it is not enough to keep sufficient room when demand is decreasing. Japan is importing more than 7 million tonnes per month of LNG, it is near the physical limit of unloading. So Japanese importers have to cut purchase immediately in order to avoid overflow of the storage.

Japan had bought LNG from 15 countries and areas before 2011, suppliers were increased to 21 countries in 2012 but shrunk to 15 again in this year.
Spot purchase from variety sources seems to be decreased, while imports from Qatar are increasing.

Japan's LNG dependence on the Persian Gulf nations rose to the record high of 28% in February. Imports from Qatar which has sufficient LNG supply capacity seems to be cost-competitive than gathering spot cargoes from all over the world. However, higher dependence both in petroleum and natural gas to the Middle East is not good for Japan's energy security.

Sluggish demand cuts China's crude oil processing

Since China's domestic petroleum inventory levels are high, refineries are forced to cut their crude oil processing.

China's crude oil imports in March dipped 2.1% on year to 5.45 million barrels per day, according to the General Administration of Customs. Accumulated crude oil imports in the first quarter fell 2.3% on year to 5.61 million bpd. Meanwhile, imports of petroleum products in Jan-Mar decreased 3.4% from a year ago.

Crude oil processing by Chinese refineries rose 3.0% on year to 10.01 million bpd in the first two months in this year. Therefore, crude oil imports seemed not enough for consumption.

However, China imported more crude oil than actual demand in the first half of 2012 in order to fill up the newly built strategic reserve facilities. Supply for the strategic reserve was estimated at about 400,000 bpd.
If strategic reserve is deducted, China's recent crude oil imports might be about 6% higher than a year ago. Current crude oil supply might be excess.

Commercial crude oil inventory level in China as of end-February was 2.9% lower from a month ago, according to Xinhua News Agency. Meanwhile, stocks of petroleum products rose 6.0% from a month earlier. It suggests that refiners processed amply imported crude oil but shipments of products were not enough.

Crude oil imports were steady in March but imports of petroleum products fell 20.2% on year. The slump of products imports proves current high inventory levels of petroleum products. It is natural that refiners decide to cut their operating rates.

Sinopec was reported to cut its crude oil processing in the second quarter from originally planned 59.8 million tonnes to 58.3 million tonnes.
Since the major state-owned company is said to reduce April processing plan by 1 million tonnes, it seems must reduce inventories urgently.

Those lower processing rates would influence on the nation's  crude oil imports in the near term.

Recovery of Japan's energy demand stays slow

Although Japan's economic recovery is anticipated widely, the country's energy consumption still remains in the sluggish level.

Crude oil processing by Japanese refineries has decreased on year in the past three consecutive weeks, according to the Petroleum Association of Japan. The latest number was 7.4% drop on year to 3.41 million barrels per day, that was the lowest processing volume since early December last year.

Japanese refineries are usually shut their facilities for maintenance in this season since petroleum demand decreases seasonally.
Showa Shell plans to cut its crude oil processing in the 2Q this year by 5.9% from a year earlier due to the maintenance shutdown at its Yokkaichi and Sodegaura refineries. Idemitsu Kosan is also scheduling to reduce its Apr-Jun crude processing by 4% on year because of maintenance at its Chiba refinery.

Although each individual companies' crude oil processing is affected by their maintenance schedule, decreasing numbers in entire Japan seem to show slowdown of petroleum demand.

Japan's weekly crude oil processing was averaged at about 3.7 million bpd during mid December 2012 and March 2013, according to the PAJ data. It was about 1.5% higher than a year earlier.

Since stocks of petroleum products has increased straightly during the period, it was clear that slightly higher on year supply of products had exceeded demand.
Moreover, products inventories have not decreased significantly despite the lower crude oil processing over the past couple of weeks.

It was of course affected by the warm weather conditions, but weak demand also seemed to lead the ample inventories.
Japan's domestic sales of fuel oil in February fell by 7.0% on year to 3.91 million bpd, according to the Ministry of Economy, Trade and Industry.

Electricity demand is also sluggish. Estimated power supply by Tokyo Electric Power Company slipped 10% on year to 23.3 billion kilowatt-hour in March.
Extremely warm temperature was likely to influence the low electricity demand definately, but it was the first two digits drop after summer 2011, when extraordinary shortage of power supply capacity after the severe earthquake forced consumers to save electricity significantly.

Weather has too much influence on electricity demand, it suggests that demand for heating has been more important due to the sluggish industrial demand.