* Asian diesel use to grow about 0.5 pct this year -Woodmac
* Asian diesel surplus in 2014 at 1.2 mln bpd -Woodmac
* Few outlets for surplus barrels due to glut in Europe
By Jane Chung and Alice Woodhouse
SEOUL/SINGAPORE, June 13 Asia's diesel demand is expected to grow this year at the second lowest rate since the 1998 financial crisis as slowing economies and subsidy cuts squeeze consumption and help build a surplus for which there are few markets.
Demand in top regional consumers China, India and Indonesia is expected to remain stagnant or fall. And as new refining capacity is added in Asia and the Middle East, excess diesel is seen hitting an annual average of more than a million barrels per day (bpd) in 2014, according to one oil and gas consultancy.
That means regional returns or cracks from processing crude into the fuel - already near 3-1/2-year lows - will remain slim, analysts said. Since diesel or gasoil accounts for nearly 40 percent of the typical Asian oil plant's output, overall processing profits will also be pressured and some regional refiners are already slowing run rates.
Asia's surplus diesel would normally be shipped west but Europe is facing a glut as well, with diesel margins there holding at multi-year lows.
"A partial recovery this year is expected but growth will probably still fall short of the levels seen in 2011 or 2012," said Alex Yap at energy consultancy FGE.
Asia's diesel demand will grow slightly faster this year than in 2013, when it rose less than 1 percent - the lowest in 15 years, FGE said.
Oil consultancy Wood Mackenzie (Woodmac) has lower numbers, forecasting diesel use in Asia to grow at 0.45 percent compared to average annual growth for the past five years at 3.9 percent.
For the second quarter this year, Woodmac estimated Asian diesel demand 0.7 percent higher than last year, while forecasting growth in 2015 at 1.7 percent.
This slow growth amid increasing capacity will result in a diesel surplus of around 1.2 million bpd this year, said Suresh Sivanandam, an analyst at Woodmac, with China's diesel exports averaging around 90,000 bpd, nearly double from 2013.
China is bringing on new refineries even as demand growth there drops to its slowest in decades, forcing Asia's top consumer to turn exporter and flooding the region with supplies far in excess of demand.
New plants in India and the Middle East are also contributing to diesel's overhang, analysts said.
Diesel is Asia's most widely consumed fuel, used in everything from power generators and factories to trains and trucks. Given its broad applications, the product is often seen as an indicator of a country's economic health.
There is some room but not a lot for Asian products to be soaked up elsewhere, said Amrita Sen, chief oil market analyst at Energy Aspects.
"Asian products have to move out of Asia ... but competition from other players such as the Middle East, Russia and the U.S. is rising," she said.
Given the excess supply, Asian refiners - especially in South Korea and Japan which account for about a third of Asian middle distillates exports - have lowered crude runs slightly.
"South Korean refiners may consider cutting run rates if the supply glut continues, but actually they have already trimmed by 30,000 bpd or 50,000 bpd so far," said a source at a North Asian refiner who declined to be identified.
South Korean refiners' average operating rate from January to April this year was 80.7 percent, down from 83.1 percent during the same period last year, data from state-run Korea National Oil Corp (KNOC) showed.
In the first quarter of this year, South Korean and Japanese refiners processed less crude than last year amid a regional supply glut.
A gradual reduction of subsidies in India and Indonesia to bring domestic gasoil prices in line with global markets is also hurting consumption, analysts and industry sources said.
Indonesia's diesel demand is expected to drop 4.6 percent this year, further than last year's fall of 3.7 percent, Woodmac's Sivanandam said.
India's diesel use fell 1 percent in the fiscal year that ended March 31, 2014, the first drop in more than a decade in the world's fourth-largest oil consumer, according to data from the oil ministry's Petroleum Planning and Analysis Cell.
New Delhi last year allowed state oil firms to hike diesel prices by small amounts every month with the aim to end subsidies eventually.
That should keep pressing down the country's demand for diesel, said a trading source based in India.
Western oil advisors and economists have for years been saying that fuel subsidies have distorted Asian oil markets, encouraged overconsumption and led to massive refinery capacity surpluses in some countries such as China.
Yet the impact of reduced subsidies in India and Indonesia may not be long-lasting as economic growth in the two countries will likely bolster demand for diesel in coming years.
"Subsidy removal has played a role in lower demand but we anticipate that the impact of price hikes on Indonesian diesel demand will be temporary, as road-freight demand for diesel will grow in tandem with the developing economy," Sivanandam said.
A series of refinery shutdowns in Australia is also likely to support demand for the fuel, helping soak up some of the regional surplus. (Reporting By Jane Chung and Alice Woodhouse; Editing by Manash Goswami and Tom Hogue)