Ample supply of Chinese motor fuels seen offsetting S Korean outages

Singapore — Supply-side fundamentals in Asian transportation fuel markets are likely to stay muted in the near term, as cuts to South Korean refinery output will largely be overshadowed by another sharp influx of Chinese supply, industry sources told S&P Global Platts.

South Korean motor fuels exports are estimated to total around 60 million barrels in Q4, down 14% from a year earlier and 9% lower from Q3, according to fuel marketing sources at SK Innovation, S-Oil Corp., GS Caltex and Hyundai Oilbank surveyed by Platts in the week of Sept. 27.

The cuts to South Korean exports of gasoline and gasoil come amid efforts to maintain the domestic and regional supply-demand dynamic balanced, while poor refining margins as well as unexpected outages also pressure output, industry sources said.

South Korea's largest refiner SK Energy for example, was heard with plans to maintain run rates at its 840,000 b/d Ulsan refinery at 70-80% in September, but is mulling the possibility of cutting rates further in October, a source with close knowledge of the plant's operations told Platts.

Another South Korea refiner Hyundai Oilbank was also heard from industry sources to be still running its 520,000 b/d Daesan complex at lower levels in contrast to a year ago, despite having initially planned to gradually raise run rates from the 75.7% average in H1 2020.

Market participants have noticed little signs of spot gasoil cargoes being seen offered for South Korea's October-loading program, with some saying that the country's domestic refiners are not looking for any spot supplies for the month due to dismal refinery margins.

On the aviation front, the industry has been plagued by the coronavirus pandemic leading to underwhelming demand as air travel demand plunged, and sellers indicated that there has been little-to-no jet fuel spot cargoes being offered in the market, adding that spot trades for aviation fuels are "very rare these days".

The move to lower exports in Q4 differs from strategies in Q3, which saw South Korean refiners step up efforts to clear some of the excess inventories at home amid a sharp slowdown in domestic consumer and industrial demand

Chinese supply to stay firm

Despite South Korean supply cuts, Chinese gasoline exports are expected to stay heavy with refiners seeking to use the regional market as an outlet to offset domestic inventory pressures.

Platts reported Sept. 25 that Chinese oil companies plan to keep their October gasoline exports at 1.428 million mt, almost unchanged from September, while reducing gasoil exports by 5.9% on the month to 1.76 million mt, industry sources with knowledge of the matter said Sept. 24.

In comparison, companies -- such as Sinopec, PetroChina, CNOOC and Sinochem -- had planned to export a total 1.43 million mt of gasoline and 1.87 million mt of gasoil in September, according to market sources.

Meanwhile, the companies plan to export 407,000 mt of jet fuel in October, with Sinopec exporting 302,000 mt and PetroChina 105,000 mt, the sources said, up from a September base of 300,000 mt.

"The inventory pressure is quite serious. Even the inland refineries are moving cargoes out to export," one Singapore-based source said.

PetroChina's 110,000 b/d Daqing Refining and Petrochemical refinery falls in this category, with reportedly having plans to export 70,000 mt of gasoline in September, after sending the cargoes to Dalian port in northeastern Liaoning province by rail.

Market impact

Against this backdrop, Asian traders have been largely cautious, and have indicated expectations that recent strengths in motor fuel markets could be short-lived.

"The [gasoline] market has gotten some support because of the Korean outages. But who knows how long this will last," another gasoline trader said.

On co-distillate gasoil, a similarly bleak outlook was seen with traders saying they did not expect any upside till the end of the year due to expectations of strong outflows of the middle distillate from China over the next few months.

"I don't see the outlook improving due to the exports from China as we are expecting them to maintain their exports on the high side," a senior gasoil trader based in Singapore said, adding that regional demand for gasoil remains weak, with pandemic-related restrictions having battered consumption.

As of Sept. 29, the cash differential for FOB Singapore 10 ppm sulfur gasoil has averaged minus 64 cents/b to the MOPS gasoil assessments, sharply deeper from the minus 28 cents/b averaged over August, Platts data showed.