South Korea seeks right balance between domestic fuel sales, exports amid diesel price surge
South Korea’s retail diesel prices rose above gasoline prices on May 11 for the first time since the Global Financial Crisis in 2008 amid tight supply of gasoil across Asia and the globe, prompting local refiners to reassess their domestic sales and export ratio of middle distillates to ensure adequate domestic supply.
The national daily average retail diesel price jumped to Won 1,946/liter ($1.517/liter) May 11, surpassing the 92 RON unleaded gasoline average price of Won 1,945/liter ($1.516/liter) on the day, Korea National Oil Corp. data showed. The last time diesel commanded premium to gasoline in South Korea was in August 2008, according to KNOC.
Around 2,000 of the country’s 3,500 petrol stations were currently selling diesel at a higher price than regular unleaded gasoline, according to distribution and sales associates at Korea Oil Station Association.
Consumer sentiment has taken a significant hit due to diesel’s premium to gasoline in many retail stations, but the price trend is the global phenomenon, with the Asian benchmark gasoil-gasoline price spread surging to record monthly and quarterly highs, middle distillate marketers at major South Korean refiners including S-Oil said.
The price spread between FOB Singapore gasoil and 92 RON gasoline averaged $25.30/b in April, the highest on record, S&P Global Commodity Insights data showed.
“Those who choose to drive diesel cars have done so because the fuel is typically cheaper than gasoline, so the current price trend would be a big shock to consumers,” a distribution and marketing manager at S-Oil said.
South Korea’s new president Yoon Seok-youl’s administration has emphasized the importance of taming inflation and curbing the fuel price uptrend, putting a lot of pressure on refiners to boost oil products output and reserve plenty of fuel for the domestic market rather than focusing too much on exports, officials at two major South Korean refiners said.
South Korea produced 30.48 million barrels of diesel in March, the highest monthly output since producing 31.06 million barrels in August 2020, KNOC data showed.
The country’s monthly average refinery run rate would be kept at near 100% with a greater focus on ramping up diesel production going forward, the refinery officials said.
South Korea is expected to produce over 31 million barrels of diesel in May, while ample supply and the government’s oil tax cut scheme could put the brakes on surging retail diesel prices, according to Korea Petroleum Association middle distillate marketers and analysts based in Seoul.
The government extended oil tax cuts to a record 30% in April for three months from May from 20% earlier as part of efforts to ease upward pressure on inflation and surging energy prices.
Export volume control
With a slew of financial and trade sanctions on Moscow disrupting Russian diesel exports to Europe, Middle Eastern refiners are focused on exporting the majority of their oil products to the West, leaving many Asia and Oceania nations to rely even more heavily on South Korean supplies, according to the middle distillate marketers.
Lucrative product cracks for transportation fuels, particularly gasoil, are expected to continue to incentivize South Korea refineries to maximize production and channel any excess barrels into the export market.
The physical FOB Singapore gasoil crack spread against front month cash Dubai has averaged $37.20/b to date in May, surging from an average of $19.30/b averaged over January-March, S&P Global data showed.
Global crude supply is tight but oil product supply is even tighter, creating ideal market conditions for highly sophisticated South Korean refineries capable of maximizing high-end fuel output and sales, the middle distillate marketers said.
However, it is crucial for refiners to put domestic supply as number one priority and maintain ample barrels at home to maintain retail price stability, they said.
The temptation is high for refiners to export as many barrels as possible to capture lucrative Asian product cracks and overseas sales margins, but they should keep their production to export ratio below 55%, analysts at the KPA said.