Japan is likely to turn to oil — mainly low-sulphur fuel oil (LSFO) or low-sulphur crudes such as Indonesia’s Duri — as replacement power-generation fuel in the wake of a massive earthquake that closed two of its nuclear plants.
Barclays Capital estimates that replacing the lost power-generation capacity will require the equivalent of 204,000 barrels of oil per day (or about 30,000 tones), similar to a Very Large Crude Carrier (VLCC)-load of low-sulphur cargoes every eight days.
While Japan would also turn to other power-generation fuels such as coal or liquefied natural gas (LNG), fossil fuel has been the most common substitute in the past, when outages occur at its nuclear plants.
“Right now, it’s not clear how much fuel oil they are going to buy, but it is quite certain that they will, and in large volumes. As of now, they have not come out to look for any low-sulphur fuel as yet,” said a Singapore-based Japanese trader.
WILL THE ASIAN MARKET BE ABLE TO MEET JAPAN’S NEEDS?
Japan’s utilities need a very specific type of fossil fuel, of 0.3 percent sulphur content, and most of its regular demand is met by Indonesia’s low-sulphur crudes, mainly Duri, and low-sulphur waxy residues (LSWR).
However, the availability of both types of fuels is limited — it exports 5-6 LSWR cargoes of 200,000 barrels each for this year, down from 6-7 parcels last year, and another 4-6 cargoes of the heavy-sweet Duri of 40,000-50,000 tones each.
“That’s not very much and most of these cargoes are already going into Japan. There certainly will not be enough to meet the extra requirements, especially at 30,000 tones a day,” a crude trader said.
“The Japanese will have to look at other alternatives and perhaps maybe even lower their very stringent sulphur requirements if the situation becomes desperate.”
WHAT ARE THE ALTERNATIVE POWER-GENERATION FUELS?
Traders said the first option, outside of Duri and LSWR, would be to look at other, more expensive sweet Indonesian crudes, such as Minas and Cinta.
However, both also have limited production volumes, of about 120,000-150,000 bpd, and are mostly in the hands of term allocation holders.
There is also limited LSWR production from regional refineries in Malaysia and Thailand, but either the volumes are tiny or specifications do not meet Japanese standards.
“At the end of the day, it might not be enough, even if the Japanese suck up all the 0.3-percent sulphur fuels, because the volumes are so limited,” another Singapore-based fuel oil trader said.
“Any other alternative would be really expensive, that is to make low-sulphur fuel oil that meets Japanese specs by blending, if it is at all possible.”
The Asian LSFO market currently is small in supply volumes, totalling about 200,000 tones a month, and higher in sulphur content compared to Japanese requirements.
Taiwan’s CPC buys about 100,000 tones a month of the 0.5 percent sulphur grade, while the marine fuels market accounts for about 50,000 tones of the below 1.0-percent sulphur grade.
Most of these cargoes are supplied by Brazil’s Petrobras, whose plants yield LSFO as residues, and blenders such as Vitol, Trafigura and Westport.
WHAT WILL BE THE IMPACT ON THE ASIAN FUEL OIL MARKET?
Fuel oil’s prompt cracks and time spreads spiked in the immediate aftermath of the earthquake on Friday, lifted by buying led by Japanese oil companies, but the gains were limited, traders said.
Its April crack to Dubai crude closed at a three-week high discount of $8.95 a barrel, up $1.61, while March/April rose to a backwardation of $5.00 a tone, up $1.38, by last Friday’s close.
Traders said Japanese players led the buying in fuel oil’s time spreads on Friday, particularly the April/May and May/June contracts, which are in steep backwardation of around $5.00 a tone and already been on an upward momentum prior to the earthquake since the start of last week.
“That’s sentiment for you, even though the LSFO market is quite separate and distinct from the main high-sulphur fuel oil market,” the second fuel oil trader said.
“And if the demand spikes come as they are expected to, the market would probably get stronger. Especially if supplies have to be pulled from the mainstream market to make expensive Japanese-grade LSFO.”
Traders said in the immediate term, they would expect cash premiums for Indonesian LSWR and Duri to rise from current levels.
