The apparent refining margin for main clean products — gasoline, gasoil and kerosene — averaged Yen 16.8/liter ($24.1/b) in April-December, up 2.4% from Yen 16.4/l a year ago, according to oil industry calculations.

Refiners do not release refining margin data, which the industry calculates based on domestic wholesale prices and the CIF crude import cost. The refining margin was the highest since April-December 2009, when it was Yen 17.2/l.

A heavy refinery turnaround season over the spring-summer period, coupled with occasional unexpected shutdowns last year, helped to boost clean products margins.

Around 25% of Japan’s refining capacity was shut during the peak of the spring-summer turnaround season last year. “Margins [for clean products] were strong when crude oil prices were gradually rising during the first half [April-September] of the fiscal year,” said Yasushi Onoda, director and senior vice president of corporate planning at JXTG Holdings, at a recent earnings press conference in Tokyo.

Refining margins were squeezed towards the end of 2018 as wholesale product prices dropped in line with international oil prices, while the crude import cost was still reflective of higher prices earlier in the year. But the margins are now slowly recovering.

Local refiners set their weekly wholesale products price based on movements in benchmark Dubai/Oman crude price. Platts Dubai/Oman prices were steady to firm over April-September last year, with the benchmark rising from $66.86/b on April 2 to hit a 2018 high on October 4 at $84.82/b, before subsequently falling to $49.75/b on December 26.

For example, JXTG Nippon Oil & Energy and Idemitsu Kosan’s weekly wholesale price differentials for main clean products — gasoline, kerosene, gasoil and A-fuel oil — a blend of gasoil and fuel oil in a 90:10 ratio — generally followed the same track over April-December, according to market information compiled by S&P Global Platts.

Noriaki Sakai, general manager of Idemitsu Kosan’s treasury department, said recently that the refiner’s margins for gasoline, kerosene, gasoil and A-fuel oil improved by an average of Yen 1.1/l year on year in the nine-month period ending December 31.

Imports Restricted Despite Open Arbitrage
Japanese refiners also enjoyed a healthy crack spread for rack gasoline of mostly above $20/b throughout 2018 — well above the $10-$15/b spread that refiners in Asia typically need to break even, Platts data showed.

Rack oil products are those that are transported by refiners and other independent suppliers over land by tank lorry, loaded from either refinery tanks or secondary tanks outside of refinery compounds.

A tighter domestic gasoline supply-demand balance led to a widening spread between Japan and Singapore. Since its establishment in April 2017 from the merger of JX Holdings and TonenGeneral, JXTG, which holds roughly half of Japan’s domestic oil products market share, has significantly reduced spot supplies to the domestic market, according to market sources.

Sources at JXTG Nippon Oil & Energy have also said that the company does not typically sell any spot cargoes in the domestic market. The average spread between the Japan domestic gasoline rack price for Kanagawa and FOB Singapore gasoline prices surged to $21.01/b in the October-December quarter from $13.10/b in April-June and $13.37/b in July-September.

But Japanese traders often find it difficult to make full use of fast-changing arbitrage opportunities because of limited flexibility in logistics and business practices. Tight domestic supplies because of refinery outages and regular exports had prompted some Japanese importers to significantly boost intake of gasoline and gasoil from overseas last year.

But the impact on domestic prices from increasing oil products imports, however, appears to be limited in Japan because of physical restrictions on availability at storage tanks, said Takayuki Uematsu, director and senior executive officer of Cosmo Energy Holdings, the parent of refiner Cosmo Oil. “Most tanks are mainly held by refiners.

Therefore an extremely limited volume could be imported because of basic structural [restrictions],” Uematsu said at a recent earnings press briefing.

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