Asian oil refiners risk long spell of reduced operating rates

Tue Jul 1, 2014 12:16am EDT

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* Many refiners to hold run rates at reduced levels in peak summer season

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* China, India to keep runs at lower rates on maintenance, excess capacity

By Meeyoung Cho and Florence Tan

SEOUL/SINGAPORE, July 1 (Reuters) - Asian refiners are set to miss out on a traditional summer sales boost, as weak demand for oil products coupled with excess regional supply reduce plant operating rates through the third quarter and into the end of the year.

The lack of a rebound in the summer period, when more fuel is usually needed to power air conditioners, signals more pain for the region's refineries, which face competition from new plants in China and India and a sharp rise in crude oil costs.

Refineries typically take down units in the second quarter for maintenance after meeting winter demand for heating fuels and before summer consumption peaks, leading to lower run rates across the region and a drawdown in fuel inventories. They then typically increase runs in the third and fourth quarters.

This year, however, reduced run rates may extend well into the next six months, said refining sources and traders. Most affected will be export-focused plants in South Korea, Singapore and Taiwan, while plants in China and India may be somewhat insulated as they feed their large local markets.

"Refining margins aren't in a good shape, and oil products cracks are very bad due to oversupply," said a Seoul-based refining source. "We aren't able to see when this will improve, which makes the situation a lot worse."

Oil products cracks are the difference between the price of crude oil and petroleum products extracted from it.

Asia has more than 30 million barrels per day of refining capacity, but slowing economies and subsidy cuts are squeezing consumption of diesel, which accounts for nearly 40 percent of the average plant's output.

Complex refining margins in Singapore, the amount earned for processing crude oil, have averaged $4.68 a barrel in the past 15 days, the lowest since last November and well below the high for the year of $6.51 touched in April.

In South Korea, one of the top regional refining hubs, operating rates have fallen to a five-year low of 85 percent, almost 10 percentage points below a year earlier, consultancy JBC Energy's Richard Gorry said.

"Refiners may cut runs in July and August as well because inventory is still high," said a source at a North Asian refiner. "This year is one of the worst for margins."

RUN RATES FALL

Singapore's refinery run rates have fallen to about 80 percent, a trader said, from 85-90 percent a year earlier.

South Korea's largest refiner SK Energy Co Ltd has cut rates to 82-83 percent at its Ulsan refining complex from 89-90 percent in the first quarter, said a spokeswoman at owner SK Innovation Co. Ltd..

Thus was largely due to maintenance, but the company may continue to operate the facility at the same level, she said.

Second-largest refiner GS Caltex is running its crude units at 89-90 percent of capacity this month, a company source said.

"As of now, we will keep operating at this reduced rate until August, but it can be reduced further," said the source who was not authorised to speak to media. "We are studying the economics now."

Japanese refiners are also trimming throughput.

Oil facilities are expected to process 3 million bpd in July, at 76 percent of capacity from 76.3 percent a year ago, said Osamu Fujisawa, a Japan-based independent oil economist.

Rates would rise in August to 81 percent, or 3.2 million bpd, but still down from 82.6 percent a year ago, he said.

"Run cuts have started and I think they will continue," said a crude trader at a Japanese trading house. "What we will see is refineries processing just enough to meet domestic market needs."

Some Asian refiners are also stretching out maintenance and skipping planned crude purchases to minimize losses, said a second North Asian refiner.

Refiners in China and India, Asia's top two consumers, don't typically tweak operating rates based on margins because they feed a huge local market and retail prices are controlled.

However, runs will fall in India in the third and fourth quarters due to maintenance, which may curb exports.

Weak demand and new capacity would keep China's capacity in the third quarter at 80-85 percent, oil analysts said, below the year's high around 87 percent. (Reporting by Meeyoung Cho in SEOUL and Florence Tan in SINGAPORE; Additional reporting by Jane Xie in SINGAPORE, Nidhi Verma in MUMBAI, Judy Hua in BEIJING, James Topham and Osamu Tsukimori in TOKYO; Editing by Manash Goswami and Richard Pullin)

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