Some Japanese refiners are considering reducing their term crude purchase commitments and adopting a more flexible spot buying strategy as a weakening yen diminishes their purchasing power, industry sources said.

The Japanese currency briefly traded at the lowest intraday level since December 1986 of Yen 161.75/$1 on July 2. The Asian currency was quoted at Yen 161.43/$1 in the early Tokyo session July 4.

The yen has been one of the most underperforming currencies in the world, putting a lot of financial strain on refiners that typically buy millions of barrels of crude oil in the international market every month, said feedstock and logistics managers at three major Japanese refiners, including Cosmo Oil.

About 95% of Japan’s crude requirements are sourced from Middle Eastern suppliers, and more than 60% of the Persian Gulf crude intake consists of term-based contracts. Feedstock managers and middle distillate marketers at two Japanese refiners said that domestic refining and oil product sales margins are under pressure due to the faltering feedstock purchasing power, while inflation is hurting domestic consumer and industrial fuel demand.

“Obviously, it won’t be possible to completely overturn current existing term contracts, but it’s possible to nominate the very minimum monthly term lifting volume, and we may consider signing a 15%-20% lower term supply deal for the next term period,” said a feedstock manager at a major Japanese refiner, declining to be identified due to the sensitivity of the company’s international trading strategies.

Japan’s crude imports fell 13.8% year on year to 2.11 million b/d in May, according to the latest data from the Ministry of Economy, Trade and Industry.

Refiners could enhance their feedstock economics and overall refining margins by adopting a more spot-based crude procurement strategy, refinery feedstock management sources said. Saudi crude imports, which were all tied to term contracts, fell 19% from a year earlier to 765,864 b/d in May, while shipments of UAE crude grades, including Murban, Das Blend, and Upper Zakum, dropped 8.2% year on year to 974,289 b/d last month, METI data showed.

Meanwhile, Japan’s US crude imports, mostly bought from the spot market, jumped more than threefold to 67,515 b/d in May, from 15,942 b/d a year earlier.

Oil product exports, sales

To recoup some of the dollar spending on feedstock procurement, more kerosene and gasoline cargoes could be set aside for exports, but jet fuel would mostly serve domestic requirements, said middle distillate marketers at two Japanese refiners and an integrated trading company.

Exporting oil products would generate dollar revenue and earnings, while sales margins are also much better for overseas shipments than domestic distribution, said a gasoline marketer based in Tokyo.

“It’s not exactly ideal to spend expensive dollars to produce something but only to sell the product in the domestic market and earn a weak yen,” the marketer said. Japan exported 57,658 b/d of gasoline in May, more than double the 20,210 b/d sold overseas a year earlier, according to METI data.

Refiners said that they would prioritize domestic airports for jet fuel sales due to the tight supply-demand balance, with logistical constraints and refinery maintenance limiting aviation fuel supplies and distribution to regional airports during periods of a tourism boom in Japan.

A shortage of domestic vessels and tank trucks has slowed refiners’ jet fuel distribution to major airports, while a parliamentary legislation that took effect in April to control workers’ overtime hours has reduced the turnover rate of domestic fuel deliveries.

Japan is at its peak refinery maintenance, shutting down close to one-third of the country’s total refining capacity of 3.11 million b/d.

In an apparent effort to address aviation fuel shortages, Japan’s largest refiner, ENEOS, has bought at least one rare prompt MR-sized jet fuel cargo for July loading. The jet fuel cargo trade emerged after an ENEOS spokesperson said July 1 that it was considering jet fuel imports as part of steps to ensure stable supplies.

Japan’s top 10 crude suppliers in May (unit: b/d)

Source: Platts