UPDATE 2-S.Korean refiners sees margins improving on diesel, cleaner marine fuels demand

* Demand for diesel, cleaner shipping fuels to support margins

* SK Innovation, S-Oil to increase LSFO output to boost profits

* S-Oil plans to shut No.1 CDU, No.2 RFCC, likely in H2 2020

* S-Oil, SK Innovation both swing to operating profit in Q4 (Recasts with SK Innovation’s results, adds comments, details)

SEOUL, Jan 31 (Reuters) - South Korean refiners are expecting firmer demand for diesel and low-sulphur marine fuels to improve refining margins and boost their profits in 2020 because of new shipping fuel rules that came into effect at the beginning of January.

Refiners have already increased production of low-sulphur fuel oil (LSFO) and marine gasoil (MGO) to meet demand for the cleaner shipping fuels after the International Maritime Organization (IMO) introduced the new rules this year.

S-Oil, whose top shareholder is Saudi Aramco , said on Friday that refining margins would recover this year, supported by the switch to the cleaner fuels and easing Sino-U.S. trade tensions.

“The company will maximise operations of desulphurisation units to take full advantage of IMO benefits,” Cho Yong-kuk, S-Oil’s treasurer, said on a call with analysts.

SK Innovation, owner of South Korea’s top refiner SK Energy, also said on Friday it expected refining margins to improve, driven by a rise in diesel demand.

S-Oil will boost output over 2020 of very low-sulphur fuel oil (VLSFO) to capitalise on strong VLSFO margins, said Ko Gwang-cheol, S-Oil’s head of investment relations. It would limit planned maintenance to its smallest units and aimed to sell about 35,000 barrels per day (bpd) of VLSFO.

S-Oil said it planned to shut down its No.1 crude distillation unit (CDU) and No.2 residue fluid catalytic cracker (RFCC) for maintenance, potentially in the year’s second half.

Refining margins, or cracks, for VLSFO have averaged at $25.60 a barrel in January, up from $20.62 a barrel in the fourth quarter.

Lee Dong-yeol, SK Energy’s senior official, told analysts in a conference call the company aimed to increase its low sulphur fuel oil production to 70,000 bpd in the second half of the year, from 30,000 bpd now.

SK Energy’s new 40,000-bpd vacuum residue desulphurisation (VRDS) unit is set to come online in March or April, it said in December.

In the final quarter of 2019, S-Oil posted an operating profit of 39 billion won ($33.4 million), swinging back to black from an operating loss of 333 billion won for the same period a year ago, as stable oil prices helped offset depressed margins.

SK Innovation also returned to operating profit in the October-December period at 123 billion won, from a 286 billion won operating loss during the same period a year earlier, due to inventory-related gains on a rise in oil prices.

Shares of S-Oil ended 0.5% higher after the earnings announcement. Shares of SK Innovation closed up 4%.

$1 = 1,167.2000 won Reporting By Jane Chung; Editing by Richard Pullin and Tom Hogue