US dollar, faltering cracks may prompt North Asia refiners to minimize gasoline output

South Korean and Japanese refiners are poised to significantly tweak their refinery linear program models to minimize gasoline output as the fuel producers expected both domestic sales and export margins to extend their downtrend over the coming trading cycles, citing tepid consumer sentiment amid the US dollar strength and accelerating inflation.

Apart from seasonally low driving activity during cold winter months, gasoline demand would be most vulnerable to fragile consumer confidence and high inflation as passenger vehicle usage counts as a lifestyle choice, while the automotive fuel has a rather weak correlation to base industrial activity, unlike diesel, middle distillate marketers and officials at major South Korean and Japanese refiners, including ENEOS, S-Oil and Cosmo Oil said.

The South Korean and Japanese product marketers highlighted that currency was starting to play a key role in Northeast Asia's faltering consumer spending power and accelerating inflation. The Japanese yen, for one, fell to a 24-year low against the US dollar in the week of Oct. 16, while the South Korean won hit its lowest in more than 13 years against the greenback on Oct. 25, according to the Bank of Japan and Bank of Korea.

"Gasoline consumption is closely affected by general consumer sentiment, rather than industrial activity, and this is why gasoline cracks have plunged," an official at a major South Korean refiner told S&P Global Commodity Insights. "Gasoline demand will also suffer over the longer term, in line with a sharp rise in demand for eco-friendly vehicles."

Analysts at Korea Petroleum Association indicated that expectations of an increase in Chinese supply following Beijing's issuance of a fresh batch of oil product export quotas recently, could accelerate the downtrend in Asian gasoline crack spread.

Reflecting on tepid gasoline demand and product margin outlook, major South Korean refiners hinted that the proportion of gasoline in their overall Q4 product slate could be slashed by several percentage points.

Gasoline typically accounted for at least 13.5% of the total oil products output over the October-December quarter in South Korea. However, the gasoline production ratio could drop closer to 12% as gasoline cracks could flip to negative territory, according to five product marketers at major South Korean refiners surveyed by S&P Global.

Asia's benchmark Platts FOB Singapore 92 RON gasoline crack against second month Dubai swaps averaged $2.70/b to date in Q4, down sharply from the Q3 average of $10.17/b and on course to set the lowest quarterly margin since the average of minus 40 cents/b in Q2 2020, S&P Global data showed.

In Japan, gasoline production in September fell 6.4% year on year to 757,884 b/d, latest Ministry of Economy, Trade and Industry data showed.

Gasoline output during the fourth quarter could be cut below 730,000 b/d, compared with the 850,893 b/d produced over Q4 last year, as a growing number of households drastically limited their passenger car usage amid surging consumer prices and living costs, according to middle distillate marketers based in Tokyo and market analysts at a Japanese integrated trading company.

Diesel, kerosene focus

Japanese and South Korean refiners see the need for greater focus on gasoil and heating fuel production for the next several months, according to the middle distillate marketers based in Tokyo, Seoul, Incheon and Chiba.

Analysts at S&P Global forecast Japan's gas-to-oil switching to be about 70,000 b/d stronger in the fourth quarter, compared with its August outlook due to high LNG prices, while estimating Q4 kerosene/jet fuel demand to rise 35,000 b/d from a year ago.

"Seasonal stocks are expected to continue towards irregular builds over the next few weeks as Japanese refiners prepares for winter heating demand," S&P Global noted in an Oct. 26 report.

Meanwhile, South Korean refiners aimed to continue focusing on capturing healthy gasoil margins, as well as ramping up sales of heating fuels, including kerosene, to Japan, middle distillate marketers said.

"Gasoil crack remains highly lucrative and the fuel's overall sales margins will continue to receive strong support from global gas-to-oil switching trend amid Russian LNG supply uncertainty," a marketing and logistics manager at S-Oil said.

Platts second month Singapore gasoil swap crack against Dubai swaps averaged $38.57/b to date in Q4, slightly lower than the Q3 average of $41.62/b, but higher than the first-half average of $30.52/b and the 2021 average of $9.61/b, S&P Global data showed.

South Korea's heating fuel exports to Japan typically spike during the November-February cold season and the cyclical trend will likely repeat, industry sources and analysts said.

South Korea's kerosene exports to Japan averaged slightly under 11,000 b/d in Q3, but they were estimated at around 18,000 b/d in Q4 and shipments could reach at least 21,000 b/d in Q1 2023, according to fuel marketing managers at three major South Korean refiners, based on the latest data from Korea National Oil Corp.