Strengthening dollar may hit South Korean, Japanese refineries' margins

Refiners in South Korea and Japan are closely monitoring the US dollar's strength against a basket of Asian currencies, as sharp weakness in the won and the yen bodes ill for crude import economics, as well as domestic fuel sales, industry sources said May 10-14.

The dollar's strength and a weak local currency would be unfavorable for refiners in South Korea and Japan as Asia's third and fourth biggest crude buyers rely almost entirely on imports for refinery feedstocks, while domestic inflation, consumer sentiment and retail fuel prices are sensitive to currency factors, oil product marketers and feedstock management sources at major South Korean and Japanese refiners said.

The Japanese yen crossed Yen 160/$1 on April 29, the weakest since 1990. The yen has been dragged by the gap in interest rates between the Bank of Japan and other central banks, according to analysts at S&P Global Commodity Insights.

The South Korean won weakened to Won 1,400/$1 on April 16 and the exchange rate continues to hover at around the 17-month low as the risk-sensitive Asian currency has been weighed by a relatively low Bank of Korea policy interest rate and shrinking trade surplus over the past couple of years.

Refining margins would be under pressure as refiners need to use dollars to buy feedstock crude oil, condensate and naphtha but earnings from domestic oil product and petrochemical sales are in the local currency, according to product marketers and feedstock managers at Cosmo Oil, HanwhaTotal Energies and S-Oil.

"It's possible to benefit from a strong dollar and a weak [local currency] by boosting product exports for external dollar earnings, but domestic oil product and petrochemical sales margins may suffer," said a marketing manager at another South Korean refiner.

"In times of a strong US dollar, it's ideal to focus on raising dollar earnings by exporting more oil products, making up for tepid domestic sales and consumer sentiment ... but what's worrying is that second-quarter Asian cracks are not looking too healthy and delivery logistics are not cheap, so exports may not necessarily yield attractive margins too," a product sales representative at another Japanese refiner said.

South Korea's domestic gasoline and diesel sales in March fell 8.8% year on year to 21.11 million barrels, while exports of the automotive fuels in the same month rose 22.6% from a year earlier to 29.1 million barrels, latest data from state-run Korea National Oil Corp. showed.

Japan also raised gasoil/diesel exports in March, by 9.7% year on year to 141,533 b/d, though the country's domestic demand for the fuel fell 1% from the same period a year earlier to 536,566 b/d, latest data from the Ministry of Economy, Trade and Industry showed.

In addition, Japan's Cosmo Oil indicated that a strong dollar and a weak yen may work against the company's fiscal year 2024-25 (April-March) upstream business as operating and other expenses would rise considering the unfavorable exchange rates.

True purpose of state oil reserve

Meanwhile, South Korea's state-run Korea National Oil Corp. issued a stern reminder that it would not release petroleum reserves to help cool retail fuel prices as the primary purpose of the state inventory is to address emergency supply-side risks.

The dollar's strength has played a significant part in the recent uptrend in South Korea's domestic retail gasoline and diesel prices, with various consumer organizations, consumer protection groups and media making enquiries to KNOC whether strategic petroleum reserves could be used to tame inflation and the retail fuel price uptrend.

However, KNOC would never release state reserves for price control reasons and the only scenario that would call for the release would be any major emergency supply and import trade flow disruptions caused by unforeseen factors such as geopolitical turmoil, industrial accidents and natural disasters, the state-run oil company said.

Pump prices of regular unleaded gasoline averaged Won 1,541/liter ($1.13/liter) in March, marking the highest monthly average since $1,585/liter ($1.16/liter) in October 2023, KNOC data showed.

Platts assessed the outright FOB Singapore 92 RON gasoline price at an average $93.26/b to date in May, compared to April's average at $102.13/b and $97.14/b in March, S&P Global Commodity Insights data showed.