Fossil fuel costs for nuclear outage in Japan to be offset by decreasing crude oil imports

Japan's crude oil imports fell 19% on year to 2.74 million barrels per day in May, according to customs data. It was first time that the country's crude oil imports slipped below 3 million bpd level since 1969.

Reduction of crude oil distillation capacity and the seasonal maintenance seem to cause the sharp drop of procurement. Crude oil processing in Japan fell 3.7% and 3.3% from a year ago in April and May, then it shrunk by 15% on year during the first three weeks in June. However, there has not been reported a lack of petroleum products in the market.

Japanese oil companies consolidated their refining facilities following the Energy Efficiency Law that was enforced in 2009. They cut about 400,000 bpd of crude oil throughput capacity in 2010, then reduced further 500,000 bpd until the dead line of the consolidation that was set at end of March this year.

In Japan, petroleum demand was predicted to increase to make up for nuclear power supply outage since 2011. But actually total crude oil imports by the nation has not increased despite additional demand from the power sector.

Even demand for thermal power generation has sustained Japan's petroleum demand despite declining fuel consumption in transportation sector that is affected by fuel-efficient vehicles, it could not boost the total crude oil imports.

Meanwhile, growth of electricity demand has been usually negative in Japan after 2011 due to power saving and change of the industrial structure. Although relatively high industrial activities supported power demand in February and March this year prior to the consumption tax hike on 1st April, reaction against that depressed the growth rate to about 2% per annum of decrease in April and May.

If Japanese oil companies reduce their crude oil procurement by 400,000 bpd (about 80% of scrapped capacity since mid-2013), the nation's trade deficit could decrease by 1.6 trillion yen ($15.8 billion) per year.
On the other hand, Japanese power companies have bought additional 17 million tonnes of liquefied natural gas for thermal power generation after 2011. It roughly costs about 1.5 trillion yen ($14.8 billion) annually.

Payments for fossil fuels are considered as one of main reasons of Japan's 11.4 trillion yen ($112.4 billion) of huge trade deficits in 2013. However, additional fuel costs to make up for nuclear power outage is not exceeding 2 trillion yen, and it is likely to be offset by reduction of crude oil imports in the near term.

Mysterious large crude oil imports by China

China has procured large amount of crude oil since late last year. Accumulated supplies exceeding processed crude oil during the past several months seem more than the country's strategic reserve capacity. Even if Chinese statistics data are not credible, many institutes use these figures for calculating their world petroleum demand forecast. The suspicious crude oil procurements by China may lead amendment of future petroleum demand.

Total crude oil supply in China rose 5.3% on year in May to 43.84 million tonnes or 10.36 million barrels per day, while growth of crude oil processing in the same month stayed at 3.5% on year to 40.33 million tonnes or 9.53 bpd, according to the government data.

Crude oil supply in May exceeded processing volume by 3.51 million tonnes. Accumulated oversupply in the first five months in 2014 is nearly 14 million tonnes. The figures include commercial stockpile.
China's commercial crude oil stockpile level as of end-April was estimated about only 1.7 million tonnes higher than that at the end of 2013, according to data issued by Xinhua News. Therefore, crude oil oversupply during Jan-May excluding the growth of commercial stockpile seems still being more than 10 million tonnes, or 73 million barrels.

However, there is a question. Does China have enough storage capacity for the large strategic petroleum reserve? PetroChina estimated that national stockpile capacity as of end 2103 was 140 million barrels, while International Energy Agency saw it could be about 160 million barrels.

First phase of Crude oil strategic storage facilities in China were built by the end 2009. The total 103 million barrels facilities were filled in 2010. Then 169 million barrels of second phase facilities are planned to complete by 2015. The construction has delayed.
Part of the second phase facilities were completed in 2011 and they were filled with nearly 80 million barrels of crude oil in the first half of 2012.

Fresh news on strategic reserve facilities have not been reported after that. But China started to procure large crude oil since late last year. Total oversupply excluding movements of commercial stockpile during November 2013 and May 2014 reached 120 million barrels. Such volume is not able to store even if the second phase of national stockpile facilities are completed.

Where are the massive crude oil stockpiles stored? Is China really importing such large crude oil shown in its Customs data?

China crude oil imports still exceed demand

China's crude oil imports in May rose 8.9% from a year ago to 6.16 million barrels per day, according to the General Administration of Customs. Meanwhile, the number fell 6.5% from the previous month's record imports of 6.81 million bpd.

 Although Chinese crude oil imports are slowing from April, it still remains at relatively high level. If domestic crude oil production in May stayed at same level as Jan-Apr, total crude oil supply in the month would be about 10 million bpd.

Chinese refineries should increase their throughput level by 8% on year in order to process the entire supply. However, it is impossible because accumulated crude oil processing in the first four months in 2014 only increased by 1.8% on year. Moreover, Chinese refineries are typically shut their facilities in May and June for maintenance prior to summer demand season.
Therefore, crude oil imports in May still seems including procurements for strategic reserve.

On the other hand, Chinese trade surplus in May surged to 35.9 billion dollar, the highest monthly surplus since January 2009. Processing trade also recorded two consecutive months growth on year.

These data suggests that energy demand in the country may be underpinned in the near term.　But customs data also showed a contrary story that China's petroleum products export exceeded import again following March. It shows that petroleum products are oversupply in China.