Japan, South Korean refiners to trim Q1 crude runs on supply glut
* Middle distillate surplus to cap refining profits, spark cuts
* Japan ships distillates overseas on weaker domestic sales
* Slow winter demand in China to keep diesel exports stable
* Naphtha, fuel oil supported by crude run cuts
By Jane Xie
SINGAPORE, Jan 27 (Reuters) - South Korean and Japanese oil refiners that account for about a third of Asian exports of middle distillates are processing less crude than a year ago, cutting runs during what is usually a high-demand quarter due to a regional supply glut.
Asia's surplus of diesel and other middle distillates developed over the last year as China, Saudi Arabia and other key markets for exporters added refineries to cut their reliance on overseas oil products just as regional demand growth slowed.
In top Asian consumer China, refining capacity added in 2013 met oil consumption growth slipping to its lowest in two decades. As decelerating economic expansion weakened domestic sales of diesel for transport and industry, China's net exports of middle distillates rose by 7 percent over July-December last year as compared with the previous six months.
Japan, Asia's No. 3 oil consumer, has also been exporting more products as domestic consumption falls, helping to flood the market. At the same time, demand in Europe, normally an outlet for Asian surpluses, has been tepid due to a mild winter.
"Winter demand is no longer there, and we are approaching a weak demand season," a trader with a North Asian refiner said. "Product stocks are also high at the moment."
The average operating rate for South Korean refiners is expected at 92.5 percent for January, energy consultancy JBC Asia said. That compares with 94.8 percent a year earlier, according to data from state-run Korea National Oil Corp (KNOC).
Operating rates for February and March are estimated at 90.2 percent and 85.5 percent, respectively, JBC Asia said, down from KNOC's estimates of 94.8 percent and 86.0 percent in 2013.
Japan's top refiner JX Nippon Oil & Energy Corp has twice announced cuts for January, bringing its run rates to 1.13 million bpd, down 8 percent from January 2013.
Showa Shell Sekiyu KK has said it will refine 1.5 percent less crude on year in the first quarter, while Cosmo Oil Co has trimmed its initial refining plan for January by 9 percent citing sluggish domestic demand.
CHINA, JAPAN WEIGH
The average profit margin to produce middle distillates from Dubai crude in January is nearly $2 a barrel lower than the same month last year.
Middle distillates, which include diesel, kerosene and jet fuel, make up about 40 percent of Asia's oil product use and the health of their margins is key to refinery profits.
Lacklustre demand for kerosene due to a less biting winter than a year ago has seen JX planning to raise its oil product exports in January to 152,000 barrels per day (bpd) from an initial plan of 132,000 bpd.
The usual winter slowdown in China's agricultural sector should also keep its gasoil exports steady at 75,000-100,000 bpd. Exports could even rise with the start-up of two refineries in the first quarter with a combined capacity of 440,000 bpd, traders said.
Those start-ups would follow the addition of 250,000 bpd of new capacity in China in the second half of 2013 that helped build the current supply surplus.
Underlining the worry over Asia's glut, state refiner PetroChina postponed bringing online two additional refineries until 2016 and 2017.
Keeping runs low to balance an oversupplied middle distillates market usually reduces supplies of other products such as naphtha and fuel oil, where strong prices are helping to offset the weak margins from distillates.
Overall profits from processing a barrel of crude into fuels in January are up $1.30 a barrel from a month ago, although refiners may be cautious in ramping up runs significantly, as that would weigh on margins again.
"Better margins is a signal to raise runs back up ... which will keep margins flattish," said Alex Yap, an energy consultant at FGE Singapore.
Cracked marine fuel prices across Japan and South Korea are likely to stay at higher levels than last year due to the lower domestic production, traders said.
Premiums of 380-cst bunker fuel in Japan and South Korea to spot cargo quotes in Singapore have shot up by at least 20 percent due to the run cuts, traders said.
Profits from refining naphtha to date are about $20 higher in January versus the same month last year.
Continued robust demand for plastics in the first quarter will also push petrochemical units to run at maximum, further supporting the naphtha market and offsetting reduced demand later in the quarter as two crackers in Japan and Thailand undergo maintenance.
"The forward curve still indicates a solid first-quarter for naphtha," said a Singapore-based light distillates trader. (Additional reporting by Florence Tan, Jessica Jaganathan and Li Peng Seng in SINGAPORE, Osamu Tsukimori in TOKYO, Meeyoung Cho in SEOUL; Editing by Manash Goswami and Tom Hogue)