Tokyo (Platts)--20 Aug 2015 611 am EDT/1011 GMT

Japanese power utility Kyushu Electric's crude and fuel oil demand for thermal power generation is expected to drop by 30% from an earlier estimate to around 350,000 kiloliters, or 24,000 b/d, over July-September, following the recent restart of its 890 MW No. 1 Sendai nuclear reactor, a source familiar with the matter said Thursday.

Kyushu Electric's oil demand has also come off since late last week as its serving areas in Japan's southwest have been experiencing milder weather, reducing power demand for air conditioning after a heat wave earlier in August, the source said.

Kyushu Electric on August 11 restarted the No. 1 Sendai nuclear reactor, marking Japan's first restart of a nuclear reactor under new safety standards introduced in the wake of the devastating March 2011 earthquake.

Kyushu Electric's No. 1 Sendai nuclear plant was shut in May 2011 for maintenance.
Japan is in the middle of its peak summer power demand season and the severity of the weather has a direct impact on oil consumption during the period.

Local power utilities use crude and fuel oil for thermal power generation when they have upticks in peak-hour power demand.

Kyushu Electric's actual oil consumption over July-September is yet to be defined by the severity of weather in the coming weeks.

In a month-long weather forecast released Thursday by the Japan Meteorological Agency, northern Kyushu is forecast to experience above the 30-year average temperatures over August 22-September 21, while southern Kyushu is expected to see average or above-average temperatures over the same period.

In July, Kyushu Electric used around 130,000 kl or 26,000 b/d of oil, predominantly fuel oil, for power output, down 35% from around 200,000 kl a year ago, the source said.

Kyushu Electric's oil consumption in August is now expected to come in around 150,000 kl or 30,000 b/d, after the heat wave earlier in the month, the source added.

Kyushu Electric earlier expected to use 500,000 kiloliters, or 34,000 b/d, of crude and fuel oil, over July-September -- same as what the Fukuoka-based utility had used for power generation a year ago.

Market sources said that possible restarts of more nuclear power reactors in Japan could add to the downside pressure on Southeast Asian direct-burning grades.

"[Japan's] nuclear power is by far the biggest threat for direct-burning oil. Demand can only get worse," said a regional sweet crudes trader.

TOUGH TIMES FOR DIRECT BURNING GRADES

Kyushu's expected lower oil demand can only further dampen sentiment for Southeast Asian heavy sweet crudes, as the market battles to clear unsold cargoes of September-loading Indonesian heavy sweet grades.

Trade sources said Japan's Itochu has around 200,000 barrels each of heavy sweet Cinta and Widuri crudes for loading in September to sell in the spot market, while CNOOC is actively looking for a buyer to take its 250,000-barrel September-loading cargo of Cinta crude.

"We are still working on it ... [selling direct-burning crudes] is not easy indeed, very tough," said a market source with direct knowledge of monthly direct-burning crude sales, adding that, there are still September-loading Duri crude cargoes available in the market.

At the start of the summer demand season, Japanese demand for direct-burning grades from Southeast Asia remained bearish, weighed by dismal fuel-oil crack values and Japanese utilities' continued preference for natural gas and coal for power generation.

In spite of heat waves in Japan in early August, "I cannot expect a big increase in demand with availability in solar power, LNG and coal," a Singapore-based sweet crude trader said.

The differential for Indonesia's Cinta crude to front-month ICE Brent futures averaged at a discount of $7.33/barrel in August to date, compared with a discount of $6.99/b in July, and a discount of $5.62/b in June, data showed.

The differential for Minas crude to front-month ICE Brent futures averaged at a discount of $5.40/barrel so far this month, compared with discounts of $5.14/b in July and $3.77/b in June.

Indonesian direct-burning crudes trade in relation to its own ICP, or the Indonesian crude price, but due to their dwindling liquidity, low production volume and limited outlet -- as it is highly dependent on export to Japan -- these cargoes are now commonly traded against prevailing Brent values.

--Takeo Kumagai, takeo.kumagai@platts.com
--Gawoon Philip Vahn, philip.vahn@platts.com
--Deborah Lee, deborah.lee@platts.com
--Edited by Haripriya Banerjee, haripriya.banerjee@platts.com

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