Robust industrial activity boosts South Korea's oil demand but consumer sentiment seen fragile

South Korea's robust manufacturing and industrial activity is expected to continue supporting the country's oil products consumption, but consumer transportation fuel demand will likely remain fragile at least during the early part of 2022 due to rising oil prices and concerns over another wave of COVID-19 infection cases.

The country's oil products demand in December jumped to a record high, latest data from state-run Korea National Oil Corp. showed, driven by the corporate sector's stellar manufactured goods exports, industry and market participants in Seoul said Jan. 28.

The world's ninth biggest economy consumed 88.51 million barrels, or an average of 2.86 million b/d, of oil products last month, compared with 75.82 million barrels a year earlier, marking the seventh consecutive month of year-on-year increase, the KNOC data showed.

For the full year 2021, South Korea's fuel demand rose 6.8% from 2020.

South Korea's economy expanded 4% in 2021, marking the highest growth rate in 11 years as consumer spending, goods and services exports, as well as construction activity bounced back sharply, according to the Bank of Korea. It was a sharp turnaround from 2020 when the economy contracted 0.9%, the worst performance since 1998, the central bank added.

Reflecting last year's stellar economic growth with major conglomerates registering robust exports of semiconductors, automobiles, electronics, petroleum products and steel, diesel consumption and naphtha demand increased sharply in tandem, according to fuel marketers at major South Korean refiners and analysts at Korea Petroleum Association.

Industrial demand

Diesel consumption soared towards the year-end amid robust industrial and manufacturing activity, while motor fuels demand jumped with a higher number of trucks carrying items from manufacturing complexes to major ports during the month, middle distillate marketers at S-Oil Corp. said.

South Korea's goods and services exports in December rose to a monthly record high at $61 billion, latest data from the Ministry of Trade, Industry and Energy showed. The country's 2021 exports jumped 26% to $645 billion, marking the fastest growth rate since 2010, with semiconductor shipments up 29% and petrochemical exports up 55% on the year.

Gasoil/diesel demand rose 12.3% year on year to 16.25 million barrels in December, which marks the biggest monthly consumption of the middle distillate fuel since 16.47 million barrels in August 2019, the KNOC data showed. For the full 2021 year, gasoil consumption gained 1.4% year on year to 166.1 million barrels.

Meanwhile, naphtha consumption also jumped 23.3% year on year to 41.450 million barrels in December and demand for the base feedstock for high-end chemicals and plastics in 2021 rose 11.3% to 450.87 million barrels, the KNOC data showed.

Demand for base chemicals for plastics both at home and abroad will likely keep South Korea's naphtha demand strong, especially with local petrochemical makers maintaining high run rates to boost output of polypropylene and polyethylene that are essential for making plastic disposable syringes and hypodermic needles, as well as other medical equipment and devices, according to operation managers at Hyosung Chemical and Hanwha Total.

Fragile consumer sentiment

Although South Korea's corporate sector is expected to continue supporting the country's oil products demand overall, consumer transportation fuel consumption will likely remain fragile at least during the early part of 2022 due to the spike in oil prices and potential re-introduction of tough social distancing measures and mobility restrictions, industry sources and analysts in Seoul said.

The country's daily COVID-19 cases surged to a fresh all-time high of 8,571 Jan. 24, prompting mass populations across major cities to limit any unnecessary travels or social activities, while the government begins to mull imposing tough restrictions once again.

In addition, despite the recent government tax cuts on automotive fuels, the spike in international oil prices has once again pushed up retail gasoline and diesel prices, putting a hefty burden on consumers.

The government has lowered taxes on auto fuels by 20% for six months from Nov. 12 to April 30 to help tame rising prices at the pumps.

However, with international benchmark oil prices extending gains sharply early in the new year to reach 7-year highs, retail fuel prices are unlikely to ease significantly, despite the tax cuts, keeping consumer sentiment and demand weak overall, a senior market research analyst at KPA said.

Meanwhile, jet fuel demand is unlikely to recover to above 2 million barrels/month seen before the pandemic any time soon as local airlines continue to suspend most of their flights on international routes, with many countries still enacting entry restrictions, according to middle distillate marketers.

Jet fuel demand fell 2.2% year on year to 1.79 million barrels in December and 2021 consumption fell 4% to 20.86 million barrels, the KNOC data showed.

South Korea's oil products demand (Unit: '000 barrels)

Source: Korea National Oil Corp.