Japan's poor appetite for burning crudes leads to overhang

Singapore (Platts)--9Jun2006

Japan's dissipated buying interest in direct burning crudes over the past
month has taken the Asian market by surprise and led to an overhang of Nile
Blend and lookalike grades, industry sources said Friday.
Power companies in Japan are known to typically stockpile Nile Blend,
which comes from Sudan, apart from Indonesian Minas, Cinta and Widuri plus
Vietnamese Bach Ho grades ahead of the North Asian summer for burning purposes
as higher temperatures increase demand for electricity.
These companies are also willing to pay hefty prices to secure the crude
supplies during this period.
In 2005, Japan's thirst for direct burning crudes pushed the price of
Indonesian benchmark Minas, which serves as the basis for all regional medium,
sweet grades, above North Sea reference Brent grade.
This year, however, crude sellers are facing a marked lack of homes for
their cargoes as high inventory levels as well as cooler-than-expected
temperatures keep Japanese buying interest at bay, traders told Platts.
Earlier, Japanese trading companies such as Itochu and Mitsubishi Corp as
well as independent trader Arcadia were seen to have made large procurements
of Nile Blend in anticipation of a healthy appetite from Japan.
As a result, differentials for Nile Blend in May spiked to about 80
cents/barrel over the official Indonesian Crude Price or ICP of Minas, Platts
data showed.
The highest level the differential had been prior to that was about 40
cents/barrel.
However, this week, Itochu was seen offering 1 million barrels of July
Nile Blend in the spot market, while Arcadia and Mitsubishi Corp. were said to
have been unable to secure buyers for their cargoes.
Talk also emerged that Minas cargoes for June lifting were still
available, though this could not be confirmed.
Over the past two years, more Japanese power companies have started using
Nile Blend in a bid to diversify the crudes they use following concerns about
a lack of availability of Minas.
Declining production at the 300,000 b/d crude field as well as
Indonesia's increasing need to utilise domestic crudes amid high oil prices
have meant a sharp drop in Minas cargoes available for export.
Only about one to two cargoes are seen in the spot market every month.
Comparatively cheaper low sulfur fuel oil as well also led to expectations
that Japanese companies could opt for this alternative feedstock for thermal
power plants.
The spread between LSFO and Minas was estimated at about $15.38/barrel in
recent sessions while the front-month cash Brent contango was assessed at
minus $1.43/barrel at Thursday's close.

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