S Korea's June Base Oils Output Stays High, Demand Rebounds

South Korea's base oils market swung from a comfortable surplus to a tighter balance in June, as demand caught up with output that stayed unusually high for a second month.

Output eased to 2.85 million barrels (402,000 tonnes) in June from 2.91 million barrels (410,000 tonnes) in May, Petronet data showed.

Lower output and imports cut total supply to 404,000 tonnes and matched combined domestic and export demand that rose to a three-month high.

The balance marked a shift from May, when production had briefly rebuilt inventories after supply shortfalls in March and April.

Stronger demand instead absorbed June’s elevated output, slowing any further inventory build.

That left South Korea entering the third quarter with little surplus supply to clear or spare barrels to cover for any further regional disruptions.

Key Highlights

·         Base oils output remained near the upper end of its recent range despite easing slightly from May.

·         South Korea maintained elevated base oils production even as refinery output of diesel and jet fuel stayed below year-earlier levels for a third straight month.

·         Base oils accounted for 3.2% of total refinery output, down from 3.3% in May but still the second-highest in close to five years.

·         Strong Group III margins continued to encourage refiners to maximise premium-grade production.

Market Repercussions

South Korea remained Asia's most dependable source of Group II and especially Group III supply, helping offset weaker shipments from Singapore, Taiwan and the Middle East.

Balanced supply reduced pressure on refiners to discount barrels or chase export arbitrage, even as regional demand eased during the seasonal summer slowdown.

The smaller surplus also left the region with less flexibility to absorb unexpected supply disruptions, as well as planned plant maintenance work expected to take place in several markets over the coming weeks.   

Strong Group III margins should encourage South Korean refiners to maintain high output. Even so, June showed that even elevated production was only enough to balance the market, not loosen it.