Analysis: S Korean gasoline producers may find exports more profitable than domestic sales in Q2

Singapore — South Korean refiners are planning to raise gasoline exports in the second quarter as they see motor fuel demand recovery in external markets outpacing the pickup in domestic consumption -- just as export margins surge as a slew of refinery operation hiccups across the region significantly tighten the supply pool in Asia.

The country's major gasoline and diesel producers including SK Innovation, Hyundai Oilbank and S-Oil plan to take full advantage of the current tight supply conditions in the Asian market to sell more cargoes to capture lucrative export margins, refinery officials and product marketing sources told S&P Global Platts.

"Domestic refined products demand has been improving over the past few months, but the pace of the recovery remains painfully slow and the outlook is always uncertain because of the volatile coronavirus spread trend ... We may put more focus on overseas sales in the second quarter as demand is stronger in the external markets," said a middle distillates marketing and distribution chain manager at S-Oil.

The appetite for motor fuels from regional net importers of gasoline has started to rebound in line with the uptick in driving activity as vaccine rollouts and a steady easing of movement restrictions continue, industry sources said.

Malaysia, Australia, New Zealand and Vietnam have all seen driving activity, a proxy for gasoline demand, recover back above baseline levels in late March, according to Apple mobility data. Other buyers such as Thailand and Indonesia are closely behind, with driving activity -- while still slightly under baseline levels -- at multi-month highs, the data showed.

In contrast, driving activity across South Korea in late March was around 40% below baseline levels, and in the capital of Seoul almost 50% below baseline levels, Apple mobility data showed.

The country is forecast to consume 236,000 b/d of gasoline in Q2, up from 225,000 b/d in Q1 as the winter low driving season came to an end, but the Q2 demand outlook is below the 244,000 b/d averaged in the same period last year, according to S&P Global Platts Analytics.

As a result, South Korea aims to sell more gasoline overseas to make up for the lackluster domestic sales outlook.

Asia's major middle distillate supplier is expected to export more than 6.6 million barrels of gasoline in April and close to 7 million barrels in May, compared with an estimated 5.8 million barrels exported in March and 5.75 million barrels in February, according to fuel marketing sources at three major South Korean refiners surveyed by Platts.

South Korea's gasoline exports averaged 7.3 million barrels/month in 2019, prior to the pandemic, and around 6 million barrels in 2020. The industry's target is boost South Korea's international sales volume to above 6.5 million barrels/month or close to 7 million barrels/month in 2021, according to a market research analyst at Korea Petroleum Association based in Seoul.

Tight Asian supply, healthy margins

South Korea's ambition to boost exports comes as little surprise to the Asian middle distillates market as the physical gasoline crack spread surges amid a slew of unplanned and extended refinery outages across the region that are tightening the supply outlook.

The 127,500 b/d Wakayama refinery in western Japan was reported to have gone offline due to a fire on March 29. The restart date for the refinery, owned by Japan's largest refiner ENEOS, remains unclear.

This was the second blaze at an ENEOS refinery in three weeks, after a blaze on March 11 at a 83,000 b/d vacuum distillation tower unit at the company's 129,000 b/d Chiba refinery in Tokyo Bay, which had been shut for regular maintenance since March 5.

In addition, a third ENEOS refinery, 136,000 b/d Oita, has been offline since a fire in May 2020 and is slated to restart only in August.

The latest outage in Japan came on the same day as a blaze prompted the shutdown of Pertamina's 125,000 b/d Balongan refinery in Indonesia.

Reflecting the regional supply situation and output disruptions, the FOB Singapore 92 RON gasoline crack against front month ICE Brent crude futures averaged $5.69/b in March, the highest monthly level since averaging $6.97/b in February 2020, Platts data showed. The crack spread has averaged $7.27/b to date in April.

South Korean refineries will undergo seasonal maintenance in Q2, but middle distillates marketers will put in a lot of effort to ship out and export as many barrels as possible from inventories to fully capture the lucrative margins, two refinery officials in Seoul told Platts.