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.

Will Japanese LNG futures be able to succeed?

Japanese government plans to launch the world first liquefied natural gas futures by the end of March 2015. It aims to cut Asian LNG prices that are currently set based on crude oil prices. Will the intention be achieved?

Japan imported 87.3 million metric tonnes of LNG in 2012, according to the customs data. Of which 60 million tonnes are bought under long-term contracts, therefore, about 27 million tonnes were urgently secured in order to make up for electricity supply shortage due to the nuclear outage.

World natural gas supply exceeded consumption by 49.2 million oil equivalent tonnes in 2011, according to BP. Since massive North American shale gas supply depresses gas prices in the region, Asian gas price are nearly four times higher than North American price.

However, does oversupply of natural gas also mean ample LNG supply as well?
Current global LNG supply capacity is at about 280 million tonnes per annum, while world LNG trade was 240 million tonnes in 2011, according to the International Gas Union. Utilization rate was 86%.

In 2012, Japanese LNG demand increased by 3 million tonnes on year, and demand by other consumers were also estimated higher. Meanwhile, growth of global LNG supply capacity is expected to be lower until 2015.

In other words, global LNG supply and demand are going to be tight.
In the global market, natural gas is oversupply, crude oil is in balanced supply and demand but LNG is in supply shortage in the near term. If pricing of LNG will be changed from current crude oil based scheme to LNG's supply and demand based scheme, Asian LNG prices might be more expensive.

On the other hand, LNG futures market on the Tokyo Commodity Exchange is unlikely to attract enough participants. TOCOM has failed to grow its Middle East crude oil futures. TOCOM crude oil futures have recorded sluggish trading since launched in 2001. Its daily trading volume is less than 5,000 contracts, that is far lower compared to more than 500,000 of NYMEX WTI's daily trading volume.

Japanese commodity futures market does not have enough appeal to attract investors. Its liquidity stays in very sluggish level, so financial institutes and hedgers are hesitant to use Japanese commodity futures market.

What will affect TOCOM LNG prices is not clear. There is a natural gas futures market on NYMEX, but North American gas market and Asian LNG market do not have enough direct relationship.

North American natural gas can be transported to Asia as LNG with the cost of $460 per tonne. However, it is just a theoretical calculation. Arbitrage trading will not occur without enough gas-liquefy and shipment capacity.

If TOCOM launches LNG futures within two years, prices could trace the crude oil market rather than NYMEX natural gas. Japan's average crude oil import price that is currently used for Asian LNG price benchmark will be likely to continue affect LNG futures.

Japan accounted for only 3.3% of global natural gas consumption in 2011, according to BP. Chinese consumption was also only 4.0% of global demand. East Asia has not been a major player in the world gas market yet compared to the US and Russia.

But LNG market is dominated by those minor players -- Japan, South Korea, China and Taiwan. East Asia accounted for 60% of world LNG demand. Therefore, international interest in the LNG market is likely not so strong.

US crude oil imports to fall more on limited storage capacity

US Energy Information Administration recently reported that domestic crude oil production in the United States is expected to exceed imports by the end of this year.

Meanwhile, net petroleum imports in the US have been already less than domestic production since early February. The latest figures in the EIA weekly statistics showed net petroleum imports fell below 6 million barrels per day compared to 7.15 million bpd of crude oil production.

Since petroleum demand in the US is the lowest level in the past 20 years, the country's dependence on imported petroleum is getting smaller.
Net petroleum imports by China are quite close to the US, Chinese buying seems to be bigger than the US in the near future.

The reason of decreasing US petroleum imports is of course higher crude oil outputs in the north America triggered by the Shale Revolution.
Increasing supply from Canada and North Dakota pushes up crude oil inventories in the US Midwest region. Current inventory level in the area is close to the  working storage capacity limit of 120 million barrels.

Crude oil stocks level at Cushing of Oklahoma reached to above 51 million barrels in early this year. The critical inventory level at the physical delivery point of NYMEX crude oil futures was close to the maximum capacity of 64 million barrel, and led Brent premium against WTI to over $20 per barrel.

However, crude oil inventory in the US Midwest has been close to the maximum level. Therefore, absence of further increase of Midwest inventory level is likely to limit Brent premium against WTI in the future.

On the other hand, current working crude oil storage level at the Gulf of Mexico region is about 270 million barrels. The latest inventory level of 180 million barrels is 67% utilization. It is much higher level compared to 53% as of the end of September 2012.

Crude oil supply from Canada and domestic inland oil fields that are not able to store in the Midwest region are being sent to the Gulf of Mexico area through the Seaway Pipeline. As long as domestic petroleum demand does not recover significantly, the US is likely to reduce crude oil imports into the Gulf of Mexico region further in order to avoid the inventory to reach the critical level.

China's Jan-Feb energy demand is slowing down

Although energy demand surged in the fourth quarter 2012, the consumption has been slowing down significantly since the beginning of this year.
Crude oil processed by Chinese refineries in January-February rose 3.0% on year to 1 million barrels per day, according to the National Bureau of Statistics.

The processing volume still remained above the 1 million bpd level, however, the growth rate was lower than 3.7% that is the average of 2012. Moreover, the January-February growth was much lower than 8.1% which was scored in Q4 2012.

Electricity output shows similar tendency. Power generation by Chinese utility firms in the first two months was 757.3 billion kilowatt-hour. The year-on-year growth was 3.7%. It was slower than the 2012 average of 4.7% and significantly lower than the last Q4 average of 8.1%.

Meanwhile, the National Bureau of Statistics says the country's industrial output rose 9.9% on year in the January-February period. The growth value is close to the average of 10.0% recorded both in whole year 2012 and the last Q4.

Since electricity cannot keep in stock like petroleum, slow growth of power demand seems to show recent actual lower demand of energy in China.
 Is China able to achieve 7.5% growth of gross domestic product as planned?

Is natural gas able to ease China's air pollution?

Consumption of natural gas is rapidly growing in China. Year-on-year growth of natural gas demand in 2012 was 12.8%, much higher than below 5% of coal and petroleum. It was tenth consecutive two digits growth.

Since coal and petroleum are said to be causing recent severe air pollution, growth of environmental friendly natural gas use may ease the problem.

China is anticipated to keep increasing natural gas consumption in the future, while the International Energy Agency estimates the country has the world biggest shale gas reserves of 1.3 quadrillion cubic feet.

However, it is not so simple matter.
First, despite the higher growth rate, current gap of consumption amount between coal and natural gas in China is still far wide.

The below chart converts each fuels amount into tonne oil equivalent. It describes that coal consumption in 2012 was 12.8 times bigger than natural gas and petroleum was 3.3 times larger than gas.

In China, nearly half of coal is estimated to be used for electricity generation. Thermal power is account for 80% of the nation's total electricity supply, hydroelectricity supplies 15% and nuclear etc provide rest of 5%.

Most Chinese thermal power plants burn coal. On the other hand, natural gas is account for 55% of Japanese thermal power plants' fuel, petroleum is 20% and coal is burned to generate 25% of total power supply.

Because of existing big difference of usage between coal and gas in China, it is quite difficult to shift thermal power fuel to natural gas immediately.

Majority of Chinese thermal power plants are constructed recently in order to meet surging electricity demand. It also seems to make power companies hesitate to change their facilities.

The following chart shows trends of electricity and coal demand in China. Consumption in 1995 was set at 100 and the lines indicate every year's growth. The chart suggests that efficiency of coal consumption to generate power is improving year by year. It is likely to be due to install of advanced facilities.

Since fuel efficiency directly affects on costs, Chinese utility firms seems to pay much efforts, but environmental measures which reduce profits do not attract their attention.