South Korea's robust economic recovery and the rapid progress of its nationwide vaccination program have raised optimism in the country's refining sector for improved transportation fuel sales in the second half of 2021, but high retail auto fuel prices could dampen consumer sentiment, industry officials and market sources in Seoul said.
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South Korea's upbeat economic indicators and its outperformance in vaccination rate have set the tone for a steady recovery in consumer transportation fuel demand, but OPEC+'s indecisive stance on raising crude production may continue to sustain the benchmark oil price uptrend, leading to high retail fuel prices and hampering consumer demand recovery, middle distillate marketers at major South Korean refiners and market analysts at Korea Petroleum Association said.
South Korea consumed 100.5 million barrels of gasoline and diesel over January-May, up 3.4% year on year, latest KNOC data showed.
The country's goods and services exports, including electronics, semiconductors, automobiles and medical devices and equipment, surged 46% year on year in May, marking the fastest growth since August 1988, according to the Ministry of Trade, Industry and Energy.
Accordingly, the Bank of Korea on May 27 sharply raised the country's 2021 GDP growth outlook to 4%, from a 3% growth projection made in February.
Reflecting the robust economic activity, Platts Analytics expects South Korea's combined gasoline and diesel demand to rebound to 714,000 b/d in 2021, up 3% from 696,000 b/d in 2020.
However, lofty retail prices could potentially chip off around 10,000-20,000 b/d of demand as many passenger car owners opt to drive less, while some construction companies put their projects on hold until diesel prices pull back, according to fuel marketers at SK Energy and S-Oil Corp. and market research analysts at the Korea Oil Station Association.
Pump prices of regular unleaded gasoline averaged Won 1,601/liter ($1.41/liter) over June 27-July 3, the highest weekly price since averaging Won 1,660/liter over Oct. 28-Nov. 3, 2018, and up 16% from last year's average of Won 1,383/liter ($1.22/liter), according to S&P Global Platts calculations based on latest data from state-run Korea National Oil Corp.
"The broader economy may be picking up fast but the jobless rate remains a concern and small businesses are still suffering in this pandemic era ... consumers are tightening their belts even more, so a spike in prices would not work in favor of domestic sales," a distribution and marketing manager at S-Oil said.
OPEC disappointment for Asia
Eleven major Asian refiners and trading companies surveyed by Platts before the July 1 OPEC+ meeting had hoped the producer alliance would continue to phase out its production cuts and return at least 1 million b/d supply to the market in August-September amid recent oil price rally.
However, OPEC+'s decision on raising collective crude output by 400,000 b/d each month from August to December remains on hold for now as the UAE and Saudi Arabia look to resolve disagreements.
With ultra-low interest rates and aggressive monetary easing policies expected to continue supporting broad assets, commodities and energy prices, Asian end-users and consumers are especially hoping for OPEC+ to at least play its part in controlling the highly inflated oil prices for the benefit of global consumer sentiment and demand recovery.
Although higher outright prices do occasionally work in favor of refiners' oil product margins, depending on the forward curve and other pricing mechanism, prices should not derail too far from consumer demand fundamentals, said middle distillate marketing managers at South Korea's SK Innovation and Thailand's PTT.
India recently renewed its call for the alliance to phase out its production cuts, saying the recent rise in oil prices was threatening the consumption-led recovery of the global economy.
Indian oil minister Dharmendra Pradhan, who has sparred with Saudi counterpart Prince Abdulaziz bin Salman over crude supplies, met virtually with OPEC Secretary General Mohammed Barkindo on June 24 to voice his concerns.
Physical sweet crude benchmark Dated Brent averaged $73.04/b in June, the highest monthly average since $81.15/b in October 2018, Platts data showed. Dated Brent has averaged $76.71/b to date in July.