Japan and Kuwait have struck a deal to store crude oil for Southeast Asia in Japan in a bid to boost the region’s oil supply network, which is currently rather weak and vulnerable to supply outages.
Japan already has oil stockpiling agreements with the UAE and Saudi Arabia for storage space totaling 16.4 million barrels.
Reports of the deal first emerged last week, when unnamed sources said that Japan has agreed to lease to the Kuwait Petroleum Corp. some 3.14 million barrels in oil storage capacity. This is equal to 1.5 days of consumption in Japan or over 10 days of consumption in Southeast Asia. According to the later reports, in times of normal supply, the Kuwait Petroleum Corp will use the place as an export base.
Kuwait is Japan’s fourth-largest oil supplier after Saudi Arabia, the UAE, and Qatar. While the country has suffered its fair share of demand destruction due to the pandemic, things are now looking up because of the winter season, which boosts demand for heating fuels.
According to the Energy Information Administration, Japan is the world’s fifth-largest consumer of oil and the fourth-largest importer of the commodity. It is also the largest importer of liquefied natural gas in the world.
Almost all of the oil Japan imports comes from the Middle East because of its proximity. In fact, this year, more than 90 percent of Japan’s oil imports came from the Middle East as the country cut orders from other countries, including Russia and the United States.
With this heavy dependency on Middle Eastern oil, an announcement by Saudi Arabia saying it would raise the price of its crude for Asian buyers in January must have come as an unpleasant surprise to Japanese oil buyers. The Kingdom said earlier this week that it would raise the price for Arab Light by $0.65 a barrel on average. Forecasts ranged from expected increases of between $0.50 and $0.85 per barrel.
By Charles Kennedy for Oilprice.com
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Therefore, it is a very wise measure to store crude oil in case of a closure of the Strait of Hormuz at a time of escalating tension between the United States and Iran and also rising tension between China and the United States.
The crude storage deal with Kuwait follows similar storage agreements with both Saudi Arabia and UAE. By renting storage in Japan, Kuwait could save a lot of money building extra storage on its territory and ensure continued safe delivery of its crude in case of a closure of the Strait of Hormuz. Unlike Saudi Arabia and UAE, Kuwait has no alternative route to the Strait for exporting its oil.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London