South Korean refiners wary of China's oil product export quota usage amid fragile margins

South Korean refiners are generally content with a slight improvement in refining margin so far in the third quarter but China's ample clean oil product export quotas and tepid regional economic activity pose a serious threat to the overall cracks and export margins, industry sources said Aug. 13-16.

Asia-wide refiners hardly faced any crude supply security or feedstock procurement issues despite the prolonged OPEC+ production cuts and geopolitical tensions in the Middle East. On the refining and oil product sales front, however, high inflation, lackluster consumer spending, and tepid industrial activity have constantly put margins under pressure, refinery sources and analysts based in Seoul and Ulsan said.

The biggest concern for highly export-oriented South Korean refiners is that an oversupply of Chinese oil products in the second half of 2024 would be detrimental to already fragile Asian oil product cracks and refining margins, according to middle distillate marketers at three major South Korean refiners including S-Oil.

Platts, part of S&P Global Commodity Insights, assessed the second-month Singapore gasoil swap crack against Dubai crude swaps at an average of $17.4/b so far in Q3, up from $16.53/b in Q2 but sharply below the average $22.12/b in Q1 and 2023 average of $22.82/b.

South Korea's domestic refining margin has recovered to $7.5/b in the first week of August from a low of $5/b seen in May but remains sharply below the $15-$20/b range seen in the first quarter, data from state-run Korea National Oil Corp. showed.

In times of fragile demand fundamentals amid lackluster Asian macroeconomic conditions, an oversupply of Chinese oil products would be devastating for the regional light and middle distillates market. Traders across East Asia are all keeping a close watch on how keen Chinese refiners are willing to utilize their export quotas throughout H2, according to oil product trading and marketing sources at South Korean, Japanese, Thai, and Indian refiners.

The Chinese government is considering the release of 15 million metric tons (around 112.5 million barrels) of oil product export quotas in September, which will bring the country's total clean oil product export quota to 48 MMt (around 360 million barrels) for 2024, Commodity Insights reported previously.

In H1, China exported 19.86 MMt or around 865,000 b/d of clean oil products comprising mainly gasoline, gasoil/diesel, and jet fuel, leaving about 13.14 MMt of quotas available for the second half of the year until a new batch of quotas is released.

In comparison, South Korea -- Asia's top middle distillate exporter and supplier -- sold 209.76 million barrels or around 1.17 million b/d of the three products overseas in the first six months.

South Korean and Chinese oil products often compete for market share dominance in various Asia-Pacific outlets such as the Philippines and Australia. Chinese traders and refiners may not necessarily fully utilize their export quotas but tepid domestic sales amid China's slowing economic and industrial activities may ultimately encourage them to export as much as they can, according to analysts at Korea Petroleum Association.

Among recent economic indicators, China's industrial production grew just 5.1% in July from the previous year, slowing from the 5.3% increase in June, missing forecasts of 5.2% growth and marking the slowest growth rate in four months, latest data from the National Bureau of Statistics showed.

"What we are closely watching out for is that China's struggling construction and property sector could lead to a high volume of gasoil exports [due to weaker domestic sales]... an oversupply would extend the current lengthy downtrend in Asian benchmark crack spreads," said a middle distillate marketing manager at a major South Korean refiner.