Japanese refiners base US crude buy decisions on OPEC+ supplies, Middle East OSPs

Japanese refiners are keen to regularly buy US crude in pursuit of feedstock import diversification, but OPEC+ supply and Middle Eastern crude price trends would mainly determine monthly North American cargo purchases, refinery sources said May 30-June 2.

Japan's refining industry continued to cheer OPEC+ members' production hike stance as Asia's fourth biggest crude importer relies on Middle Eastern suppliers for well over 90% of its total crude purchases.

Eight OPEC member countries involved in voluntary crude production cuts including Saudi Arabia, the UAE and Oman have agreed May 31 to an accelerated quota increase of 411,000 b/d for July. Japanese refiners are in full support of the group's higher output strategy of late as it provides stability in Persian Gulf official selling prices and refining margins, feedstock managers at three major Japanese refiners said.

Light and medium sour Middle Eastern crudes including Saudi Arabia's Arab extra light and Arab light, UAE's Murban and Das Blend are typically Japan's top five monthly feedstock grades. Availability and OSPs for those grades greatly determine the overall margins for Japan's refining industry, refinery feedstock managers said.

Light sweet US grades also play an important role in monthly refinery feedstock blend mix to boost middle distillate yield. However, the ultimate decision regarding how much WTI Midland and WTL barrels should be bought depends largely on the supply and cracking economics of the key Persian Gulf grades, according to feedstock management sources at two Japanese refiners including ENEOS.

"The [OPEC+] voluntary cutters are restoring their output quotas and that's a very positive move [Japanese refiners]," the ENEOS feedstock management source told Platts, part of S&P Global Commodity Insights, adding that it's efficient to seek incremental term Saudi or Abu Dhabi barrels than to buy an extra spot WTI Midland cargo.

Alaskan crude

Meanwhile, Japan is evaluating the long-term feasibility of importing Alaska North Slope (ANS) crude, with Petroleum Association of Japan President Shunichi Kito recently noting that the government is "positively considering" an option involving an 800-mile pipeline to connect ANS supplies to the Nikiski export terminal.

Kito acknowledged the significant effort, time, and cost involved in this plan, while discussions are ongoing among government officials, gas companies, and oil development firms. Despite these considerations, he emphasized that Japanese refiners are taking a cautious approach, prioritizing refining economics in their decision-making.

While ANS crude has not been part of Japan's refinery slate in recent years, some refiners are already importing substantial amounts of WTI Midland crude.

However, refinery feedstock managers indicated that incorporating ANS into regular operations may be challenging due to the prevailing preference for Middle Eastern sour grades and the superior yields of WTI Midland for jet fuel and gasoil.

April import data

Japan bought 2.332 million b/d of crude from Middle Eastern suppliers in April, making up 93% of the monthly refinery feedstock intake, sliding from 96% in March, the latest data from the Ministry of Economy, Trade and Industry showed.

Light sweet US crude shipments in April, including WTI Midland and WTL, more than doubled to 97,798 b/d from 42,847 b/d a year earlier, METI data showed.

Most of the April arrival cargoes were purchased during the January-February trading cycle. The sour crude benchmark Dubai price structure was at a 26-month high early in the first quarter, resulting in high Middle Eastern crude OSPs and spike in demand for more economical US barrels, traders based in Singapore and feedstock managers in Tokyo said.

However, the Dubai market structure has significantly declined since OPEC+ adopted a production hike stance, making Middle Eastern crude OSPs more reasonable. Feedstock managers at Japanese and South Korean refiners indicated that it's important to balance the Persian Gulf and US crude procurement based on refining margins.

According to a survey of Asian crude traders conducted by Platts, there are expectations for slight decreases in Saudi Aramco's July OSP differentials for Asia-bound crude cargoes. For Aramco's flagship Arab Light crude, surveyed trading and refining sources predict a month-over-month cut of 30-50 cents/b.

Japan's top 10 crude suppliers in April (Unit: b/d)

Source: Ministry of Economy, Trade and Industry