-West Japan domestic market in 2024; refineries to be reorganized and distribution channel to change-

In West Japan, Idemitsu Kosan is scheduled to discontinue refining at its Yamaguchi refinery in March 2024, following ENEOS' Wakayama refinery that stopped refining in October 2023. The refining capacity of around 250,000bbl would be disappeared for half a year and this surely has an impact on the market. Along with the end of the grant at the end of April, supply/demand fundamentals might significantly change in spring.

Although this winter is mild, cold waves and snowfall might temporarily change supply/demand situation. Temperatures sharply dropped from about 20 degrees Celsius to about 10 degrees Celsius and it snowed in the Hokuriku, Chugoku and Kyushu areas in mid-December 2023.

【Chukyo】
In January through March, supply/demand would likely be a more important factor than costs in the kerosene market. Costs would unlikely change significantly. The Agency for Natural Resources and Energy would continue giving the grant until the end of April. Thus, domestic wholesale prices are expected to be stable even if crude oil prices sharply rise or fall.

Supply/demand would be key
Especially on the supply side, both bullish and bearish factors are observed. ENEOS set sales quota of kerosene for November 2023 onwards at 90% of last year's sales volumes of each branch. ENEOS is reducing transfer by coastal tankers by adjusting shipments between distant areas since operations of such tankers are tight.

ENESO aims to reduce import as the international market are soaring and the yen is depreciating against the dollar, which deteriorate profitability. In this situation, some wholesalers suffered a shortage in sales quota allocated by importers in Chukyo. Sales quota cuts by the largest importer have impacts to some extent. Idemitsu Kosan does not cut sales quota but reportedly does not supply more volumes than last year's sales volumes. If demand sharply rises amid cold snaps, supply/demand might tighten in Chukyo.

However, since coastal tankers are in short and importers curb sales in areas, barge cargoes might flow into the Chukyo region. Refinery cargoes that cannot be supplied to Hokkaido with the biggest demand might be discharged at Kyugochi. If these cargoes compensate for the shortage of refinery cargoes caused by tight supply from importers, supply/demand fundamentals might loosen in the whole of Chukyo.

【Hanshin】
In the truck market in Hanshin, it would be more important than ever to secure tank lorries to transport fuels in 2024.

In October 2023, ENEOS finished refining at its Wakayama refinery and fuels are supplied from neighboring refineries such as Sakai refinery to end-users in Wakayama prefecture. As lorries run for a long distance between prefectures, transportation efficiency decreases.

Transportation of fuel oil
The number of tank lorries for fuel oil is fewer than that for clean oil. Some wholesalers keep lorries for fuel oil via term contracts and advance deadlines of orders due to the end of refining.

Nevertheless, the end of refining at the Wakayama refinery is causing "Limited disruptions of transportation so far," according to a wholesaler. As end-users in the northern part of Wakayama prefecture close to Osaka have been doing business with the Sakai refinery and the impact of the end of refining is limited. Even so, another wholesaler said, "The more lorries go to the southern part of Wakayama from Osaka, the more difficult to secure lorries to run in Osaka and Kyoto other than Wakayama."

As the upper limit of overtime working hours by lorry drivers would be regulated in 2024, which is called "2024 issue", market players are wary of stable transportation going forward.

【Shikoku】
In Shikoku, market players expect demand for kerosene and fuel oil for heating to grow in this season. But temperatures exceeded 10 degrees Celsius in December and wholesalers were suffering poor sales of kerosene. Kerosene sales in winter of 2022 toward 2023 are said to have been lower than the previous winter by 20% amid mild weather.

The Japan Meteorological Agency forecast that temperatures would be above normal in West Japan until February and snowfall would be light as winter weather patterns would not occur that much. Recently, more gasoline is supplied from sellers in the same groups and wholesalers actively offer surplus cargoes to retailers.

Meanwhile, market sources mentioned that gasoil was offered to supply to intank at over Yen 1 lower than those to other companies in the industry and retailers and said that it was impossible to follow, adding that slowdown of kerosene and fuel oil demand had very serious impact.

The Shikoku area is already facing "2024 issue" and a serious shortage of lorries in the logistics and transportation industry. Due to a lack of truck drivers, lorries cannot be fully operated. "There is no availability of lorries although we don't receive many orders. We give the first priority to securing lorries rather than rates. As kerosene is essential in winter, delays and skips of transportation are never allowed."

【Fukuoka】
In 2024, supply situation might significantly change. Seibu Oil in Idemitsu group would suspend operations at its 120,000 barrels per day (b/d) Yamaguchi refinery in March. The supply situation of truck cargoes would likely change a lot in the neighboring Chugoku and North Kyushu areas.

Taiyo Oil is reportedly scheduled to undergo major turnaround at its 138,000b/d Shikoku refinery. Taiyo Oil received administrative punishment in 2022 and were not allowed to obtain certification of high-pressure gas for two years because the company failed to report leakage of high-pressure gas and to apply for permission of repair works. Several market players indicated that the company would halt its crude distillation unit (CDU) for regular inspection during June to July 2024 and December 2024 to January 2025. Importers are anticipated to revise barter contracts and this would inevitably affect transportation of barge cargoes to terminals in Kyushu. The long turnaround by Taiyo Oil might tighten supply/demand fundamentals more than usual in the spot market in West Japan.