• South Korea's base oils output rose to a four-month high in May as refiners increased run rates despite lower diesel production

• Domestic demand fell to a 21-month low, allowing supply to exceed consumption by the widest margin in 16 months

• Rising stocks and still-subdued exports pointed to surplus volumes building, raising the prospect of a further rise in shipments that would add to supply in Asian and global markets

South Korea's base oils output rebounded sharply in May while domestic demand weakened, creating the largest supply surplus in more than a year and pointing to a reversal of the disruption-driven tightness in recent months.

Output rose to 2.91 million barrels (410,000 tonnes) in May, up 15% year on year and from 2.40 million barrels in April, Petronet data showed. The volume was the highest in four months and the second highest in 50 months.

The increase followed the completion of scheduled maintenance in early May. But the scale of the rebound pointed to more than a simple recovery from shutdowns.

Concerns had focused on refiners prioritising diesel production amid supply disruptions and strong fuel markets. Instead the opposite occurred.

Base oils output rose to its second-highest level in 50 months while diesel production fell 22% year on year and remained close to the lowest in more than five years.

The divergence pointed to the impact of surging premium-grade base oils margins since early March.

The price trend encouraged South Korean refiners to maximise output from the largest alternative supply source of Group III base oils since Middle East supply paused.

Key Highlights

• Base oils accounted for 3.3% of total refinery production in May, up from 2.9% in April and the highest share since July 2021.

• Overall refinery production rose 7% year on year but remained the second lowest in 63 months.

• Domestic base oils consumption fell year on year for the first time in three months, dipping to a 21-month low.

• Total supply exceeded total demand for the first time in three months and by the widest margin in 16 months.

• Stocks recovered to a three-month high, while exports improved from April but remained below average monthly levels in the year to March.

Market Repercussions

Higher prices pulled more supply into the market just as disruption-driven buying began to fade.

Demand surged across many markets in March and April as buyers accelerated purchases to protect against supply disruptions.

A fall in South Korean consumption could be an early sign that this process was beginning to reverse, amplifying the impact of higher output.

That shift would leave refiners facing a different challenge. Instead of managing tight inventories and strong buying interest, they could face pressure to place growing surplus volumes into export markets.

A pick-up in shipments would coincide with seasonal demand weakness and blenders’ moves to work down inventories.

Rising supply and weaker demand would mark a sharp reversal from the disruption-driven tightness from early March. The factors driving that tightness could instead add to a growing surplus.