South Korea's July Base Oils Output Stays Elevated For Third Month

South Korea's base oils output stayed elevated for a third straight month in July, helping the country plug more of the Group III supply gap left by ongoing Middle East disruptions.

Output edged up to 2.85 million barrels (402,000 tonnes) in July, up 0.4% from June and 4% higher than a year earlier, Petronet data showed.

The run kept output above 2.84 million barrels for a third straight month, a level reached only twice in the 47 months to April.

Sustained production at elevated levels has allowed South Korean refiners to keep exports high as buyers in Southeast Asia, Europe and the Americas look for alternatives to weaker Singapore, Taiwan and Middle East supplies.

That steadiness has let South Korean refiners capture more of the windfall from surging Group III prices, absorb a larger share of global demand, and partly offset the drop in Middle East shipments to Asia.

Key Highlights

·         Higher base oils production contrasted with an 11% fall in diesel output, extending its decline for a fourth straight month.

·         Total refinery output recovered to a six-month high but stayed 6% below year-earlier levels and down for a fourth straight month.

·         Base oils accounted for 2.7% of total refinery output, down from more than 3.1% in May and June, but above the 2.5% average in the year to March.

·         Domestic supply outpaced demand by around 10,000 tonnes in July, after a slight shortfall in June, a relatively narrow gap for a market that typically swings further in either direction.

Market Repercussions

The global Group III market has grown increasingly reliant on South Korea to offset the Middle East's lost supply, with the country's refiners stepping up in a way that has benefited both themselves and buyers worldwide.

But sustaining run rates this high for this long is difficult. High exports also leave little room to build inventories that could absorb any maintenance work or unplanned outage.

Any such planned maintenance or unexpected production issues would remove supply from a market that has few spare barrels elsewhere to compensate.

The pressure is likely to increase as several Group III units in other markets embark on scheduled maintenance and seasonal demand recovers, while Middle East flows remain severely disrupted.