China's petroleum fuel demand reaches record high

Petroleum fuel consumption in China was estimated to be the record high in July. Although crude oil processing in the country in July rose 7.1% on year to 1.39 million tonnes per day, crude oil processing figures have been decreasing after the previous record that was scored in December 2012. Meanwhile, shipment of petroleum fuel rose to the record high in July, since suppliers reduced inventories.

China's crude oil import in July was record high at 842,000 tonnes per day, while the country's end-July crude oil stocks fell 1.6% from a month ago. It is not sure whether the higher import was stored to strategic reserve without being processed in the month or not. However, supply of petroleum fuel such as gasoline and diesel seemed not to be enough in July, because petroleum fuel stocks as of end-July fell 5.0% from a month earlier. Especially, gasoline inventory slipped 7.2% on month.

Automobile manufacturing in China rose 15.1% on year in the first seven months in this year. It is quite higher growth compared to 6.3% on year during 2012. More cars require more fuel like gasoline and diesel. It's OK. Meanwhile, slower crude oil processing in China over the past several months despite the steady growth of petroleum fuel could suggest slump in demand for other industrial fuel or petrochemical materials.

Is first Chinese crude oil futures prepared well?

China has aimed to launch domestic crude oil futures market since early last year. Chinese government originally announced to start trading the crude oil futures by the end of 2012, then the launch was postponed to early 2013. The official plan has been changed again to the end of 2013. Further postpones might be seen.

Recently, news reported two private companies in Zhejian province in eastern China have been granted license to store each 7 million barrels of crude oil. It was the first case private companies were granted crude oil storage licenses.

China has about 200 million barrels of strategic petroleum reserves at national storage facilities and major state-owned companies. The amount could cover about 20 days of the nation's petroleum consumption. Meanwhile, Chinese private companies don't have crude oil storage at moment.

On the other hand, Chinese government is scheduled to allow private companies to import crude oil in 2014. Crude oil imports in the country has been permitted only to some major state-owned companies. China's total crude oil import in 2012 was 271 million tonnes or 5.42 million barrels per day. However, private companies could be allowed to import only 10 million tonnes in 2014.

If China launches crude oil futures without enough commercial stocks and free import, the market seems to become gambling place that does not have relationship with physical market. Futures market project under such situation seems to be a figment.

Some market participants are expecting that crude oil storage and import by private sector may satisfy requirement of healthy futures market. But they are still missing overwhelmingly compared to the total crude oil distribution in China. In the United States, commercial crude oil stocks are about 360 million barrels compared to the strategic reserve of 7 million barrels.

In the fast economic growing country, systems may be reformed more rapidly than expected after started changing. However, it is not sure that liberalization in the Chinese crude oil market will accelerate or not.

Japan's oil demand recovers regardless of the thermal power

Petroleum demand is recovering in Japan. Although many people imagine that it is due to consumption for thermal power triggered by heat wave, recent growth of petroleum demand in the nation is actually not related to electricity. Petroleum consumption for thermal power is rather decreasing in Japan.

Tokyo Electric Power Company used about 117,000 barrels per day of petroleum in July for thermal power. It was 27% lower than a year ago despite the company's total electricity supply in the month increased 1.8% on year.

Monthly petroleum consumption by Japanese 10 major utility firms recorded year-on-year decrease consecutively in the first six months in this year, according to the data by the Federation of Electric Power Companies. Average oil use in Jan-Jun period fell 21.2% on year to 438,000 bpd, especially consumption in June slumped 32.3% from a year ago.

Japanese electric power companies have reduced use of petroleum and liquefied natural gas for thermal power, since they are increasing coal-burning thermal power capacity. Coal consumption by the ten firms in the first half of this year rose 11.5% to 26.66 million tonnes, while their LNG use in the same period fell 0.4% on year to 27.35 million tonnes.

On the other hand, total petroleum supply (domestic sales and net exports) by Japanese refineries increased on year during Apr-Jun, according to the Ministry of Economy, Trade and Industry.

In the breakdown, supply of gasoline and gas oil shown steady increase, but fuel oil supply was weaker despite close to the summer electricity demand season.

Moreover, crude oil processing by Japanese refineries rose 3.0% on year to 3.42 million bpd in July, according to the Petroleum Association of Japan. Thus, steady petroleum demand seems to be continuing. It may reflect the economic recovery in the nation.

Price gap between LNG and coal/oil widens in Asia

Retail electricity prices in September in Japan are scheduled to be mixed depend on regions. Electric power companies that are depending on liquefied natural gas for their thermal power fuel will raise prices, while the others will cut prices. 

Japanese utility firms revise retail power prices every month based on fuel prices during the previous three months. Imported LNG prices were firmer during April-June period, while coal and crude oil prices were weaker. Retail electricity prices set by seven of total ten companies will be record high.

Asian natural gas prices have been sole higher than other energy prices.

Regional coal prices have been under downward tendency since January 2011 and Dubai crude oil prices are in long-term declining since March 2012. Although Asia natural gas prices have ceased further rising after surged by 50% following the severe earthquake hit Japan in March 2011, widened price differential against European gas prices has not shrunk yet.

The reason why Asian natural gas prices have been hovering at expensive from other region's gas prices is Japan's demand for thermal power, of course.

If demand from emerging countries like China is supporting Asian natural gas prices, why prices need to be standstill since early 2012?

LNG consumption by Japanese electric power companies have reached to the physical limit since early 2012, when thermal power generation by LNG-burning power stations exceeded 35 billion kilowatt-hour in January 2012, more than 80% of generation capacity was used.

Japanese utility firms are unlikely to buy more LNG without building new facilities, while they cannot reduce purchase of LNG significantly without resuming nuclear power plants. Thus gas prices are stable at relatively high level.

Japanese power companies have reduced LNG use slightly from a year ago since the beginning of this year, because they expanded coal-burning thermal power capacity. But higher coal-burning power generation is difficult to be alternative to LNG-burning power output, since LNG is account for nearly 60% of Japan's total thermal power generation in Japan.

Japan's nationwide electricity demand in June rose 0.6% on year, posted the first year-on-year increase since December 2012, according to the Federation of Electric Power Companies. Electricity supply by Tokyo Electric Power and Kansai Electric Power also rose around 2% on year in July. Power demand in Japan is recovering. On the other hand, Japan's trade debt is increasing sharply due to LNG imports. Therefore, active discussion about resume of nuclear plants might be seen in the near term.