From the Persian Gulf to Tokyo Bay: A Holistic Analysis of the Japanese Refinery Supply Chain

Abstract

In this paper we undertake a comprehensive analysis of the Japanese refiner’s logistics and supply chain. The physical characteristics of crude oils and products have a direct bearing on their prices in the market. Accordingly, we begin with the physical attributes that make crude oil refining a unique and complex supply chain. Using the Arab Gulf to Japan as our case study, we then look at the physical transportation of crude through the Strait of Hormuz, the Strait of Malacca, the South China Sea, and finally, into the Japanese market. We then turn our attention to a local refinery in Japan and the refinery units at its disposal. Refineries utilize mathematical models built upon the processes and constraints within the refinery to optimize their economics and planning functions. Local price reporting agencies are examined to get a better sense of the specifications and idiosyncratic characteristics of the local and surrounding markets in North East Asia. We then turn our attention to the risk management tools available to refiners in the region such as derivatives available for hedging and volatility and seasonal analysis. We find several products in the region to be highly seasonal and exhibit unique volatility characteristics that are counter to conventional commodity forward curves.