South Korean refiners target peak operating rates amid high margins, exports


South Korean refineries will operate at almost full capacity in October to benefit from strong refining margins that are expected to hold up well into the fourth quarter due to tight supply of products globally.

A shortage of middle distillate products like diesel and aviation fuel in the US and Europe due to both maintenance-related and unplanned refinery outages and a lack of capacity expansion is keeping global premiums high.

This tightness in the West is attracting cargoes from Asia and allowing export-oriented refiners like South Korea to enjoy good margins despite slowing fuel demand in countries like China.

SK Energy - South Korea's largest refiner, with a capacity of 1.1 million bpd - earlier planned to shut crude distillation unit No. 2 at its 840,000 bpd Ulsan refinery in October for a month.

It has postponed the maintenance shutdown to 2013 to exploit good refining margins and recover inventory losses, said a Seoul-based trader who declined to be named.

South Korea's complex refining margin to benchmark Dubai crude averaged around $8.50/bbl as of last week, down slightly from $9.30/bbl a month earlier.

“Refining margins, which act as a market indicator, will likely continue to remain strong. This is because despite an increase in US gasoline consumption, there is no global refining capacity expansion whatsoever,” analyst Youngchan Baek of Hyundai Securities said in a note.

Strong refining margins in Asia are driven by middle distillates and will be supported by winter demand for heating oil in Europe and Asian refiners diverting production to kerosene from jet fuel.

The South Korean government is also trying to contain high fuel prices by encouraging imports through tax breaks for electronically traded barrels. Due to this, a substantial volume of diesel is being imported to South Korea, mainly from Japan, traders said.

South Korea has traditionally been a diesel exporter, with exports rising 9.5% to 113.1 million bbl for the January-August period this year.

However, its diesel imports have also jumped to 1.9 million bbl for the January-August period from 461,000 bbl during the same period last year, preliminary data from Korea National Oil Corp. showed.

South Korea's diesel imports rose to 826,000 bbl in August from just 98,000 bbl in April, data showed, indicating local arbitrage from Japan to South Korea that pushed up the premium for ultra-low sulfur diesel ex-Japan by 30-40 cents/bbl.

South Korea's refiners - SK Energy, Hyundai Oilbank Corp., GS Caltex and S-Oil Corp. - processed around 2.59 million bpd of crude oil in August, up by about 180,000 bpd from a year earlier, according to KNOC.

Refinery runs in South Korea are expected to be around 2.67 million bpd in October, during which no maintenance is planned, according to a Dow Jones Newswires survey.

Dow Jones Newswires

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