South Korea Extends Retail Fuel Tax Cuts Amid Economic Challenges

The South Korean government has announced an extension of retail fuel tax cuts until the end of April in a bid to alleviate the impact of rising consumer prices and bolster confidence in the economy.

S&P Global Commodity Insights reports that industry experts are skeptical about the potential impact of these tax cuts on domestic automotive fuel sales, given the current subdued economic environment. Instead, South Korean refiners are expected to shift their focus towards exporting gasoline and diesel, taking advantage of improving Asian crack spreads.

The Ministry of Economy and Finance disclosed that the tax cuts, which have been in effect since November 2021, will continue with a 25 per cent reduction on gasoline and a 37 per cent cut for diesel until April. This decision comes amidst ongoing geopolitical uncertainties in the Middle East, which continue to influence global oil price volatility.

While the tax cuts aim to ease the financial burden on consumers, analysts remain cautious about their effectiveness in stimulating domestic demand. The upcoming parliamentary elections in April add a political dimension to the government’s decision, as it seeks to navigate economic challenges and maintain public confidence in President Yoon Seok-yeol’s administration.

Despite the extension of tax cuts, projections suggest that South Korea’s gasoline and diesel demand will remain subdued in the first quarter of 2024. Weak private spending, low consumer confidence, and sluggish industrial activity are cited as key factors contributing to this tepid outlook.

Data from the Korea National Oil Corporation indicates a significant decline in gasoline and diesel consumption in December 2023 compared to the previous year. Refiners anticipate that gasoline demand in Q1 may struggle to surpass historical levels, with estimates ranging from 200,000 to 210,000 barrels per day (b/d).

Refiners are taking a cautious approach, reflected in the government’s decision not to expand the rate of tax cuts. This decision could have potentially boosted domestic demand but was not pursued due to prevailing market conditions.

With domestic market conditions remaining subdued, major South Korean refiners are turning their focus to export markets in the first half of 2024. Despite weak demand in Northeast Asia, opportunities in Southeast Asia, South Asia, and Oceania are promising, supported by improving regional cracks and export margins.

Platts data indicates a positive trend in regional gasoline and gasoil cracks, with prices averaging higher in Q1 compared to previous quarters. This, coupled with anticipated economic stimulus measures in China and increased travel demand during the Lunar New Year holiday, suggests favorable conditions for refining margins in the region.

As the industry prepares for winter heating demand and the spring maintenance season, South Korean refiners remain cautiously optimistic about capturing potential upticks in cracking margins. With a focus on export markets and evolving regional dynamics, refiners are ready to navigate the complexities of the global energy landscape in the coming months.