Asian traders anticipate surplus middle distillates from South Korea after Seoul floods

Record downpours in South Korea is expected to hit August auto fuel demand significantly and prompt local refiners and trading firms to release large volumes of surplus gasoline and diesel into the regional spot market, putting pressure on near-term Asian middle distillate crack spreads.

Middle distillate traders across Asia and Oceania indicated that the regional market is closely monitoring South Korea's gasoline and diesel export volumes for the next few trading cycles as Asia's major oil products supplier is poised to witness its domestic summer automotive fuel demand sharply undershoot expectations after heavy rains battered the country, triggering massive floods the past two weeks.

Highly populated Seoul metropolitan area suffered record rainfalls throughout August, the heaviest in 115 years. Heavy downpour that started Aug. 8 in the capital city and surrounding areas, home to half of the country's 51.62 million population, wreaked havoc, with main highways that run through the capital area flooded and closed for several days.

Seoul's railway and subway lines were also suspended for several days. All of the restrictions have been lifted at the moment, but can be re-imposed as more rainfalls are expected later in the month.

Market analysts and refinery fuel marketers in Seoul told S&P Global Commodity Insights that August automotive fuel demand at Asia's fourth biggest petroleum consuming nation could fall by around 15%-20% year on year, taking into account the numerous road closures and the latest damage assessment data, which indicated that more than 11,000 vehicles had reportedly submerged, out of some 23 million units in total.

The submerged vehicles, mostly in Seoul, should and would be scrapped, according to second-hand auto dealers and analysts at major insurance firms based in Seoul.

The government mobilized workers and soldiers to prioritize restoring buildings, roads and other facilities in the capital area as part of emergency recovery measures, officials at the Ministry of Land, Infrastructure and Transport said, but it may take several weeks for full recovery.

Cracks under pressure but still attractive

In anticipation of robust summer fuel demand, on top of stellar Asian middle distillate cracks, major South Korean refiners had ramped up feedstock trades for third-quarter arrival to support high refinery runs, with the country's crude oil imports in July jumping 23.7% year on year to 96.5 million barrels, latest customs data showed.

However, as refiners broadly expected domestic product sales to fall significantly short of initial targets, they have a choice between cutting run rates or ramping up exports to clear unsold stocks, a senior market trade flow analyst at Korea Petroleum Association based in Seoul said. The latter seems the more prudent and likely option.

"In the first half 2022, four refining majors including SK Innovation, GS Caltex, Hyundai Oilbank and S-Oil combined posted a record half yearly oil product exports of $28 billion," the KPA analyst said. "Although refining and export margins seemed to have peaked for the year, it's still at highly attractive levels and the refiners wouldn't hesitate to release more supplies into the Asian market."

The four major refiners declined to share specific near-term middle distillate export plans, but marketing managers at two refiners hinted that September and October exports could be raised by 10% or more year on year if required.

South Korea exported 52.4 million barrels of gasoline and diesel combined over September and October 2021, data from state-run Korea National Oil Corp. showed.

"Any sharp increase in surplus stocks at home wouldn't exactly ring alarm bells since cracks, especially for diesel/gasoil, remains attractive, while the overall export market condition will likely remain healthy heading into winter as expensive LNG continue to drive gas-to-oil switch across Asia," according to a sales and marketing strategist at S-Oil.

Month-to-date in August, Platts M2 Singapore gasoil crack spread versus Dubai swaps averaged $39.52/b, down 41.46% from record high $67.51/b reached June 24, but sharply higher than the 2021 average of $9.61/b, S&P Global data showed.