* Middle distillate surplus to cap refining profits, spark
* 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 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,
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
"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)