Japanese oil sector gets closer to market

Japanese oil sector gets closer to market

SINGAPORE (Dow Jones): A gradual increase in competition - following deregulation of Japan's oil sector in the nineties - could eventually result in a challenge to the dominant role of Singapore-based oil product pricing in Asia, according to traders.

A competitive 4.7 million barrel-a-day Japanese market - complete with physical price assessments, product and crude futures, and rising imports and exports - would provide a better price discovery environment for many parts of Asia than the current sub-1 million b/d Singapore market, they said.

Add to this is the gradual tightening of product specifications by other countries in the region, bringing them closer to those in Japan, traders said.

As competition has taken hold, inefficient refiners' balance sheets have worsened. Additionally, retail prices have fallen dramatically relative to those in other industrialized countries, making them more competitive at the international level.

This makes them good candidates for use as benchmarks for deals elsewhere in Asia, particularly northeast of Singapore.

However, the process still has some way to go, and is complicated by currency issues.

Japanese deregulation is only slowly bringing competition. The government has deliberately given refiners, which had been protected from competition and imports until 1996, time to adjust, partly to avoid major casualties.

But analysts say recent restructuring, including refinery closures, mergers - notably the Nippon-Mitsubishi tie-up - along with better access for non-refiners to retail and distribution infrastructure, is slowly changing the nature of Japan's domestic market.

The role of international oil majors in Japan is also significant, with Exxon Mobil Corp. regarded as particularly aggressive in retail price competition.

"The 100 percent control over prices which Japanese refiners used to enjoy is no longer the case," said an Asian oil trader.

Prices derived from the Singapore market have long acted as a benchmark for the majority of trade in Asia. But recent changes in trade flows and refining capacity additions outside Singapore have undermined its position, cutting production, exports and trade.

"Asian markets are a lot more complex than (Singapore benchmarks) can reflect," said one trader. "The current situation is far from satisfactory," he added.

"(Singapore's) central (pricing) role is a relic from when Asian trade was very different... These days, fundamentals in north Asia bare little resemblance to what's going on in Singapore," said another trader.

Taiwan's Chinese Petroleum Corp., or CPC, has already switched some of its export contracts to include a link to domestic Japanese prices, assessed by Rim Pacific Co. Its new domestic competitor, Formosa Petrochemicals Co., a unit of Formosa Plastics Corp., is considering a similar move.

CPC says it is using Rim quotes, "because they are more representative of the Japanese market, which is where the customers are from."

Traders were skeptical that the Middle East would change its relationship to Singapore prices - however inappropriate the link becomes - due to "an extreme conservative culture."

But another Middle East-based trader reiterated dissatisfaction with Singapore benchmarks. "It's absurd that a tiny traded volume there can effect prices of so much product across such a wide area, particularly when Singapore stocks are low," he said.

The biggest problem in using Tocom's contracts for hedging is the currency exposure, according to traders. Tocom's two existing contracts - for kerosene and gasoline - are both listed in yen per kiloliter. The planned listing of gasoil next spring, and Middle East sour crude later this year, will be in the same units.

A Tocom spokesman said government regulations made it "technically difficult" to list in dollars-a-barrel, although he said it wasn't actually prohibited by law.