Japan's base oils supply lagged demand in July for the first time in four months, as a sharp drop in imports outweighed steady output, leaving fewer barrels available to the rest of Asia.

Total supply fell to 182,000 kilolitres (161,000 tonnes), versus demand of 185,500 kilolitres, according to Ministry of Economy, Trade and Industry data. Output held broadly steady at 174,500 kilolitres, edging down from June but up 9% year on year.

The shortfall marked a reversal from May and June, when a round of destocking cut demand, offsetting a sustained slowdown in imports. Firmer demand in July met a further drop in imports, tipping the balance the other way.

The shift showed how the Middle East-linked supply disruptions were changing countries’ supply balances, with Japan's domestic production increasingly covering requirements that imports previously filled and leaving less available for export.

Key Highlights

·         Imports fell for a fourth straight month, with flows from Qatar sinking to a 21-month low and South Korean volumes staying below the level needed to offset the drop.

·         Imports covered just 4% of total supply, matching the lowest share since January 2024.

·         Domestic demand covered 91% of total supply and 95% of domestic output, both well above June and the past year's typical levels.

·         Base oils output over the first seven months of the year rose 4% year on year to 1.20 million kilolitres, as production climbed for four straight months to July.

Market Repercussions

Japan's output stayed firm as imported supply fell, allowing domestic production to cover more of the country's requirements, although differences in specifications could limit the extent of substitution.

Rising use of domestic supplies also reduced the volume available to overseas buyers.

A similar pattern emerged in the US, where lower imports left domestic producers covering a larger share of demand and cutting supply available for export.

China has moved the opposite way. Lower imports from the Middle East have coincided with higher domestic output and record exports, letting Chinese refiners fill some of the gaps left by weaker supplies from Japan and the Middle East.

With global supply disruptions extending through the third quarter,  China’s growing ability to meet buyers’ requirements could leave it supplying more markets, including those that have also sourced from Japan.