Key Points of Outlook for 2010 Petroleum Products Prices

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					IEEJ: March 2010

Key Points of Outlook for 2010

                             Petroleum Products Prices in Japan

                                                           Tadashi Maekawa, Senior Research Fellow
                                                                               Oil Information Center
                                                            The Institute of Energy Economics, Japan

          Demand for petroleum products has remained sluggish. Particularly, gasoline demand,
though recovering somewhat on a substantial price drop from a record high in 2008 and expressway
toll cuts on holidays, has declined remarkably on structural factors including a drop in the number of
registered vehicles, minivehicles’ rising share of automobiles in use and vehicle fuel efficiency
improvements. Diesel oil exports were capped on sluggish overseas prices last year after wholesalers
took advantage of diesel oil’s sulfur-free quality to boost exports to cover a decline in domestic
demand. Kerosene demand has been falling on consumers’ growing shift to air-conditioners for
heating and progress in a general shift to electricity. Oil refiners attempted to tighten the
supply/demand relationship for petroleum products by cutting production in response to the sluggish
demand. In October 2009, the capacity utilization of refineries in Japan fell by 5 percentage points
from a year earlier to 68%. But the supply/demand relationship has failed to tighten.

          More than one year has passed since Nippon Oil corp. and Idemitsu Kosan Co. introduced a
new market-linked petroleum product pricing system in October 2008. In July last year, most other oil
refiners joined the two firms to adopt the new pricing system for the first time in about 20 years since
the Gulf War. As the supply/demand relationship has remained easy, however, petroleum prices have
been weak reflecting fierce competition among retailers. The easing supply/demand relationship and
weakening prices forced profit margins for oil refiners and product distributors to decline substantially
to record-low levels. Falling demand and profit margins have deteriorated earnings conspicuously at
petroleum products wholesalers and retailers.

          As noted in another report, crude oil prices shot up and plunged in 2008 and gradually
recovered in 2009. In line with such wild fluctuations of crude oil prices, Japan’s gasoline prices
peaked at 185 yen per liter in August 2008 and fell back fast to 110 yen in December of the same year.
Gasoline prices started 2009 at an average 106 yen and soared toward summer. After rising to 129 yen,
however, gasoline prices turned down. The average gasoline price came to 126 yen in the Oil
Information Center’s last survey (on December 21) for 2009.
IEEJ: March 2010

             As for crude oil prices this year, the IEEJ projects the benchmark WTI futures price to
average around $70/barrel (plus or minus up to $10/barrel) for the “reference case.” Under such
situation, Japan’s oil demand is expected to slacken over a long term. Although some upturn is
expected in the demand season for kerosene, petroleum products prices in Japan are predicted to move
little in the absence of major price-boosting factors.

                      Changes in retail prices of gasoline, kerosene and diesel oil

                                          Record high at 185.1 (8/4)                                Gasoline price
                                                                                                    Diesel oil price

                                                                                                    Kerosene price

                      Extra tax
                                                                                               Gap with the
                                                                                              peak at 59.0 yen

                                                                                          gap at 20.2 yen

                                                                                  Gap with the
                                                                                 peak at 61.5 yen

                                                                                  Gap with the
                                                                                 peak at 62.5 yen