Winter Warmth Seen Flooding Asia With Japanese Kerosene: Energy

The mildest winter in four years is prompting Japan to export the biggest volume of kerosene in a quarter century, squeezing profits for Asian refiners while cutting fuel expenses for airlines.

Japan has shipped enough of the transportation and heating fuel since December to fill a very large crude carrier, the most in at least 25 years, according to the Petroleum Association of Japan. January temperatures in Tokyo were the highest for the month since 2010, the meteorological agency said. Asia’s regrade, a measure of the profit from producing kerosene or jet fuel instead of diesel, will widen to a discount of $1.50 a barrel from April to June, compared with 60 cents so far this month, said IHS Inc., an industry consultant.

Record winter kerosene exports are adding to signs that unpredictable weather patterns are changing trade flows in global energy markets. While Arctic storms bolstered fuel demand and helped refiners in the U.S. reduce stockpiles, an unseasonably warm winter in Japan is pushing their Asian counterparts such as JX Holdings Inc. in Tokyo and South Korea’s SK Innovation Co. to look further afield for buyers. In Europe, natural gas prices are poised to extend a bear market amid the mildest weather since 2008.

“These exports are an extraordinary incident for Japan, the traditional winter kerosene importer,” said Osamu Fujisawa, a Tokyo-based independent oil economist who has worked for Royal Dutch Shell Plc and Saudi Arabian Oil Co. “Asia’s oil market generally expects Japan to import about 50,000 barrels a day during the winter period.”

Domestic Sales

Japan is exporting kerosene at a time when Prime Minister Shinzo Abe is seeking to drive a recovery in the world’s third-biggest economy with fiscal and monetary stimulus. Escalating fuel-import costs contributed to the nation’s record current-account deficit in December as all of Japan’s 48 operable nuclear reactors remain shut for inspections after the 2011 Fukushima disaster.

Kerosene, which can be used as jet fuel, is widely used in rural areas in Asia and Africa to light lamps and as a low-cost cooking fuel. In Japan, it’s burnt in home heaters.

Japan exported about 1.9 million barrels, or 30,800 barrels a day, in the nine weeks through Feb. 15, said the Petroleum Association, which represents the nation’s refiners. Imports in November and December averaged 41,100 barrels a day, according to the most recent statistics from the trade ministry.

Domestic sales of kerosene declined 14 percent in December from a year earlier, the ministry data also show. Sales slid 8 percent in January, PAJ Chairman Yasushi Kimura said on Feb. 20.

Snow Storms

Apart from the weather factor, “there’s been an energy shift among household users from traditional kerosene to electricity and gas for heating,” said Kimura, who is also the chairman of JX Holdings, Japan’s largest refiner. “As a result, monthly kerosene sales continued falling year-on-year. We’re facing persisting tough conditions.”

January temperatures in Tokyo averaged 6.3 degrees Celsius (43 Fahrenheit), the highest for the month since 2010, according to Japan’s Meteorological Agency.

A series of snow storms in the U.S. boosted fuel demand in the world’s biggest oil consumer, sending prices of crude, refined products and natural gas higher. This prompted refiners to import European gasoil and propane to cover low inventories, reversing typical trade movements, the International Energy Agency said in its monthly report on Feb. 13.

In Europe, natural gas prices are set to decrease by more than 20 percent in the first quarter amid the mildest weather since 2008. Gas demand in the U.K., the region’s largest market, is at the lowest in 12 years.

Ramadan Demand

Regrade swaps in Singapore, Asia’s biggest oil-trading center, dropped below zero on Jan. 16, according to data from PVM Oil Associates Ltd., a London-based broker. Kerosene was at 85 cents a barrel below gasoil on Feb. 20 and minus $1.72 today.

The discount will expand with the end of the peak winter heating season, according to Premasish Das, a director of Asian and Middle East oil markets at IHS in Singapore. Demand for gasoil, or diesel, is also expected to rise in the Middle East toward the end of the second quarter, making kerosene even less attractive, he said.

“Before Ramadan, you’d expect a lot of diesel demand,” Das said of the Muslim fasting month that will take place in June and July this year.

Still, unpredictable weather could shore up Asia’s kerosene market. Japan experienced two winter storms this month, with central Tokyo covered in as much as 22 centimeters (8.7 inches) of snow on Feb. 8, the most in 20 years. Temperatures averaged 5.2 degrees in the capital between Feb. 1 and Feb. 24, the coldest since 1988.

Airline Fuel

Kerosene demand was “steady” in the first half of this month, said Kimura at the Petroleum Association of Japan. In the week through Feb. 15, the nation didn’t export the fuel.

Reduced jet-kerosene prices will benefit carriers including Singapore Airlines Ltd. that count fuel as their biggest expense.

Global airline passenger traffic climbed 5.2 percent last year, a “clear improvement trend that bodes well for 2014,” Tony Tyler, the director-general and chief executive officer of the International Air Transport Association, said in a statement on Feb. 6.

The fastest growth of domestic and international demand combined was recorded by carriers in the Middle East and Asia-Pacific, according to the group based in Montreal, Canada, which represents about 240 airlines. The slowest expansion was in Europe and North America.

Weaker Regrade

“Airlines will benefit from low kerosene-jet fuel prices in Asia amid increasing number of travelers now,” said Fujisawa. “Weaker regrade can be happy news for them too.”

Kerosene supplies may rise in the region as refiners boost crude processing to maximize gasoline stockpiles, according to Fujisawa.

“I can’t find any factors that can support regrade in the second quarter,” Fujisawa said. “Gasoil demand is pretty strong in Asia and the Middle East. I expect the regrade to continue falling to as low as minus $2 toward the summer.”

Before it's here, it's on the Bloomberg Terminal.