Japan power utility interest boosts Asia-Pacific crude oil amid high LNG, coal prices

Asia-Pacific medium to heavy sweet crude oil grades have piqued the buying interest of Japanese power utilities during the peak summer demand season as lofty prices of typical generating fuels prompt a search for competitive alternatives, boosting regional crude prices in the process.

While LNG and thermal coal remain the main feedstocks for power generation in Japan, regional sweet crudes offered for September loading have attracted the attention of some power utilities, market sources told S&P Global Commodity Insights July 25-29.

Vietnam's state-owned PetroVietnam Oil recently sold a 300,000-barrel cargo of its flagship medium sweet Chim Sao crude, with a typical API gravity of 42.1 and 0.028% sulfur content, to Japan's Mitsubishi Corporation for September loading at a premium of $21/b to Platts Dated Brent assessments, FOB, according to traders.

The traded level was 50% higher than a month earlier and the highest premium on record for the grade, according to traders, who said the cargo was purchased for utility Kansai Electric.

"Chim Sao crude is the benchmark now; any grade similar to Chim Sao is good [for power utilities]," a Singapore-based crude trader said.

The differential for light Bach Ho crude, a similar quality grade to Chim Sao, was assessed at a premium of $19.75/b to Dated Brent, FOB July 26, the highest since Platts launched the assessment on Dec. 16, 2008, S&P Global data showed.

As well as planning to resume power generation(opens in a new tab) at several nuclear reactors and secure capacity at thermal power plants, Kansai Electric was seeking competitive crude cargoes as feedstock, traders said.

"It's an exception buy in a very niche and tight market, that's why the high premium [to Dated Brent, FOB] is supported, with coal and LNG prices so strong," a Southeast Asia-based crude oil trader said.

Some Northeast Asian power utilities could also accommodate heavier sweet crudes, such as Australia's Van Gogh, which typically has an API gravity of 16.7 with 0.04% sulfur.

"Japanese power utilities can take medium to heavy sweet crude -- they used to take Van Gogh too on the heavy end -- as well as Minas and Duri, but the latter two are no longer [widely] available [in the spot market]," the Singapore-based trader said.

Japan's main power supplier ENEOS expects its April-September fuel oil demand for power generation to be up 90% from a year earlier, a trend that is likely to continue over October-March, S&P Global reported earlier(opens in a new tab).

High LNG prices

LNG spot prices have been elevated throughout 2022 after a colder than usual winter and supply concerns at various projects in the Asia-Pacific region and for Russian pipeline gas in the Atlantic.

The JKM monthly average remained above $23/MMBtu over June-August, surging from $11/MMBtu in the same period of 2021 and $2.11/MMBtu in 2020.

JERA, Kansai Electric, Osaka Gas, Tohoku Electric and Hokkaido Electric all imported spot LNG cargoes in response to project hiccups, strong downstream demand and outages at coal-fired power plants after an earthquake in spring, while other Japanese importers have avoided spot LNG purchases since the start of their fiscal year on April 1 due to the high prices.

"Avoiding spot purchases is our top priority," a Japanese power utility source said. "Last year there were many coal [fired power plant] outages. This year, we have been lucky."

Most end-users in western Japan, China and Taiwan and privately-owned LNG importers in South Korea have been priced out of the spot LNG market in recent months. However contract LNG import prices remain at least half that of spot prices, and many importers in Asia have stressed the importance of signing long-term contracts.

"Now, a long-term contract is a treasure," a Japanese gas utility source said.

However, many Japanese importers facing difficulties in price review negotiations over their long-term contracts with suppliers are seeking alternatives, with some projects in Asia facing depleting LNG reserves after decades of operations, and uncertainty over the timing of nuclear power generation units resuming operations.

Coal weather disruptions

The price of Australian thermal coal favored in Japan has skyrocketed due to extreme rainfall disrupting mining operations and delaying shipments from Newcastle port.

The price of 5,750 kcal/kg NAR coal delivered to Japan surged to $248.21/mt CFR July 28 from $137.48/mt CFR Jan. 3, S&P Global data showed.

"[Seaborne] demand from Japan has been quite bullish and we sold spot cargoes to Kansai in July on index-linked prices. The recent floods in Australia have impacted production and hence supply from Newcastle is tight for August and September," an Australian miner said.

Data from Commodities at Sea showed Australia shipped 7.1 million mt of thermal coal to Japan in June, up from 6.5 million mt a year earlier.

"We expect Japanese imports of seaborne thermal coal to average around 9 million mt/month through the June to August period, similar to 2021 levels, as coal-fired generation escalates to serve peak summer demand. Additionally, we expect escalation of imports through the Q4 2022 to an average of 9.7 million mt/month to prepare for winter demand," Platts Analytics said in a report published July 21.

Japan is always interested in Australian coal and their contracts are based on the index, which is currently quite volatile, an Indonesia-based trader said.

"The paper market for [thermal] coal is volatile while physical prices are comparatively lower and hence the volatility," a Singapore-based trader said.

Japanese buyers could also be cautious about coal specifications and may avoid trying coals of a new origin, an Indonesia-based miner source said.