China's commercial oil inventory is low

China's May official Purchasing Managers Index rose 0.2 percent points from a month ago to 50.8 despite market players expected below 50 figures. The nation's economic growth seems to be recovering especially in manufacturing sector. Recent uncertain forecasts for Chinese economy might be eased.

However, if Chinese economy shows steady growth, current low commercial petroleum inventories might not be able to meet energy demand.

China's crude oil inventories excluding strategic reserves as of end of April inched up 0.1% on month, while petroleum products inventories fell 3.3% from a month ago, according to Xinhua News. Although Xinhua does not supply actual inventory figures, end-April crude oil stocks were estimated at 3.8% lower than a year ago level based on calculation by previous monthly changes. Petroleum products inventories were estimated 4.8% lower than a year earlier. Products stocks have decreased year-on-year in the past 3 consecutive months.

Chinese crude oil inventory is usually reach the annual peak in the third quarter, then decreases to the bottom in the early next year. Petroleum products inventories, on the other hand, hit the bottom in autumn and increase to the peak towards next year's Lunar New Year holidays.

Crude oil processing in the first half of 2012 was in slump, therefore crude oil inventory rose above 32 million tonnes. Then inventories had decreased significantly, since processing rebounded sharply in the later half on the year. Crude oil supply (domestic production and imports) exceeded processing in only four months during July 2012 and April 2013. In rest of months, volume of crude oil processing exceeded supply.

Growth of petroleum inventories during the period was relatively lower than processing. Petroleum products stocks as of end-February 2013 fell 3.9% on year. It suggests that shipments of petroleum products in China were steady between mid 2012 and early 2013. That is match with the fact that Chinese PMI has exceed 50 over the past eight months.

However, growth of Chinese apparent oil demand is seen shrinking. The apparent demand in 4Q 2012 was 7.8% increase on year, then it was 4.2% growth from a year ago in 1Q 2013, according to Platts. But the growth rate was only 2.1% on year.
The PMI figures in the latest few months are even higher than Q4 2012. Actual energy consumption and business confidence seem to have gap.

Petroleum demand for thermal power in Japan is shrinking

Petroleum consumption for thermal power by Japanese ten major utility firms fell 24.7% to 1.78 million kiloliters or 374,000 barrels per day in April, according to the Federation of Electric Power Companies. It was the fourth consecutive months decrease and monthly declines have exceed 20% since February.
Warm weather seemed to reduce electricity demand in February and March, but lower demand in April looks serious situation.

Total electricity demand in Japan has decreased on year in the first four months in 2013, while nuclear power supply is rebounding on year since March. Therefore, demand of thermal power declines further.

Petroleum fuel usually suffers the biggest influence when thermal power demand decreases.
Use of petroleum, which includes crude oil and low sulphur fuel oil,  by ten major utility firms was peaked at 734,000 bpd in February 2012. Then the maximum consumption during the last summer was 559,000 bpd in August and the maximum demand in the latest winter was 629,000 bpd in December. Petroleum consumption for thermal power is in a downward tendency clearly.

Domestic weekly supply of low sulphur fuel oil has decreased by more than 10% since early April, according to the Petroleum Association of Japan. Declines in the latest three weeks were 40-60% from a year ago.
On the other hand, exports of low sulphur fuel oil, that had been stopped after September last year, are resuming in the latest six weeks. It suggests that domestic fuel oil market is still overflowing despite the decreasing supply.

Positive anticipation is expanding on Japanese economy recently, however, it is still unclear when energy demand begins rebound.
Electricity supply by Tokyo Electric Power Company fell 1.5% on year in the first half of May. It suggests that the company's power supply may continue to decline in this month.

LNG may be oversupply 10 years later

The United States will be a net Liquefied Natural Gas exporter after 2020, according to the Annual Energy Outlook 2013 by the US Energy Information Administration.
Massive LNG supply is expected in the future, while exports from the North America is still unlikely to be remarkable within the coming several years.

Traditional natural gas production in the US had peaked out below 20 trillion cubic feet at around 2000. Natural gas production has boosted by the shale revolution over the past several years following the declining until 2005. In 2011, the nation's natural gas output recorded 7.8% on year growth.

Although US gas production and consumption are forecasted to slowdown in 2013 and 2014, subsequent outputs are expected to exceed consumptions by about 1 percent point every year. The US currently imports 1.7 trillion cf per annum of natural gas, but it will turn to exporting country in 2020.

LNG is likely to be the main export. Currently the US re-exports imported LNG, however, it is scheduled to start exporting domestic sourced LNG in 2016. The nation's LNG exports is expected to grow to 1.6 trillion cf by 2027. Since total net natural gas export by the US is forecasted at 2.04 trillion cf in 2027, LNG will account for nearly 80% of total gas exports.

1.6 trillion cf of LNG is equivalent to 78 million tonnes.
Japan imported 8.73 million tonnes of LNG in 2012, while before the severe earthquake it imported 70 million tonnes in 2010.
The new US supply could cover almost 90% of Japanese LNG demand in the state in which to stop nuclear plants.

Since about one-half of US LNG exports will come from Alaska, it is apparent that the nation aims to develop the Asian market.

Current LNG prices in the North America is below $5 per million British Thermal Unit. The ample supply depresses natural gas prices in the region significantly. Meanwhile, LNG prices in the Europe are about $10 per mbtu. Europe is supplied natural gas both from Russian pipelines and Middle Eastern LNG. Asia doesn't have enough pipeline gas supply, so the region is depend on LNG supply from the Middle East, Southeast Asia and Australia. Prices in the area is about $15 per mbtu. Then prices in South America where is far from main LNG suppliers are the most expensive.

The big price gap makes people to think there is a enough business opportunities. However, consuming countries will also have to construct sufficient facilities to accept the massive new supply. Otherwise, large volume of LNG cargoes may flood in the market like current North American natural gas.

Demand in Asia, of course is expected to grow. But China seems not to convert existing coal-burning thermal power plants to gas-burning facilities broadly, because of the economic rationality.

Japan's imported LNG price in March was about 80 thousand yen per tonne, according to the Customs data. It is equivalent to 11.7 yen for the volume to generate 1 kilowatt-hour of electricity. Meanwhile, coal price was 3.5 yen and fuel oil price was 14.7 yen as well.

Even if massive supply from the North America depress the Asian LNG prices, the price level might not drop below European prices significantly. But LNG prices should decline to the current US price level in order to compete with coal prices.

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.