Diesel Risk
The diesel risk is expanding in the oil refining industry. Korean oil refiners are trying to export the portion left after domestic sales, but their margin is on the decline due to the oversupply of diesel to the international market and decreasing demand in Southeast Asia and China.
India and Indonesia, two of the largest customers for Korean oil refining companies, have recently cut their petroleum purchase subsidies, as domestic oil consumption increased. In particular, the Indonesian government marked up the prices of gasoline and diesel by 44 percent and 22 percent each in the second half of last year. During the same period, petroleum demand fell 4.6 percent from a year earlier in the country.
Another problem is China turning itself from a diesel importer into an exporter. The Chinese economy is losing steam these days, which resulted in less diesel demand and imports.
“China is exporting more than 300,000 tons of petroleum a month on a consistent basis, which has been quite unprecedented,” said a local oil refinery representative, adding, “The demand is decreasing faster than the supply in the Japanese market as well, leading to the export of the surplus amount.” The rep. continued, “Diesel is in use for industrial purposes as well as in the car market, and the recent situation seems to have much to do with the industrial slumps as of late.”
Diesel sellers’ margins are declining due to an inventory glut. According to KB Investment & Securities, the diesel-Dubai crude oil spread reached US$14.80 per barrel as of June this year, the lowest ever since early 2011.
The unfavorable trend is also associated with oil refiners’ competition for facility advancement. They have developed their facilities over and over in order to obtain extra gasoline and diesel by reprocessing bunker C oil, which is left after the extraction of gasoline and diesel from crude oil. Such advanced facilities produce more diesel than gasoline. At present, GS Caltex is recording an advancement ratio of 34.6 percent, followed by Hyundai Oil Bank (34.4 percent), S-Oil (22.1 percent) and SK Energy (20.8 percent).
Nowadays, some oil refining and chemical companies are importing extra light crude condensate for use in additional diesel production. “The inventory problem is likely to get more severe down the road, because of the recent expansion of diesel plant facilities in the Middle East,” another company explained, continuing, “Still, we are in no position to maintain our inventory and have to push it out by means of price cuts.”