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* India's IOC buys 9 mln bbls crude to increase May output

* Formosa to increase crude runs to 460,000 bpd

* S Korean refiners to leverage gasoil exports to Europe - Citi

March 8 (Reuters) - Some Asian refineries plan to increase output in May to cash in on high prices for gasoil exports to Europe, even as the steepest crude prices for 14 years threaten profit margins, numerous trade sources said.

European diesel supplies have shrunk following the disruption of western sanctions imposed on Russia in response to its invasion of Ukraine, which it describes as a "special operation".

Russia is the world's top exporter of crude and oil products combined, at around 7 million bpd, or 7% of global supply, the International Energy Agency said. Europe relies on Russia for 60% of its diesel imports, Citibank said.

Strong European demand has boosted Asian refiners' profits for producing gasoil for exports to the West. However, Asian refiners are also paying record premiums for Middle East crude supplies after the disruption of sanctions left buyers with limited options.

Indian state refiners have increased crude runs to boost oil product exports to offset some of the losses they have incurred for selling gasoline and gasoil at lower rates in the domestic market.

Asia's top fuel exporter Taiwan's Formosa Petrochemical Corp will also raise output, while South Korean refiners are already maximising their exports.

"High product cracks, especially in gasoil will encourage full capacity refinery runs even if it means exports rather than taking refinery maintenance shutdowns generally planned in Q2," Hindustan Petroleum Corp Ltd's Chairman M K Surana told Reuters.

Last week, Indian Oil Corp bought 9 million barrels of spot crude as it delays maintenance at its Paradip refinery.

"In the current environment, exporting fuel is very attractive but we have to first meet Indian demand," an official at one of the state refiners said on condition of anonymity.

Indian refiners, which buy most of their oil under annual contracts, are geared towards maximising diesel output as the fuel accounts for about two fifths of refined products consumption in the country.

COMPLEX REFINERS FAVOURED

"We like Asian complex refiners as the current record-high Europe diesel price premium will incentivise arbitrage flows from Asia and tighten supply," Citi equity analyst Oscar Yee said in a note, adding that South Korea's S-Oil Corp and SK Innovation, owner of Korean top refiner SK Energy, were among its top picks.

Formosa Petrochemical plans to raise its crude runs to 460,000 barrels per day in May after completing maintenance, company spokesman KY Lin said, although it plans to draw on inventories first to mitigate high feedstock costs.

Some refiners are expected to be cautious about buying crude as record premiums and a spike in freight costs could squeeze profits, traders said. In addition, steep backwardation - when prompt prices are higher than those for future months - makes it economically risky for refiners to hold oil for long.

A senior Japanese refining source said Japanese refiners with spare capacity or production would reduce the number of barrels exported as a first step.

At top importer China, state refiners could be ordered to maintain or even ramp up processing to ensure domestic fuel supplies in the second quarter, despite shrinking refining margins, trading and refinery sources said.

A state-run refinery official based in southern China said margins start to turn negative when benchmark oil prices hit $110.

Brent on Tuesday was trading above $126 a barrel.

"At the refinery level, we'd naturally respond by trimming production lower, but our parent company may feel compelled not to cut production," the refinery official said, asking not to be named.

(Reporting by Florence Tan, Koustav Samanta and Aizhu Chen in Singapore, Nidhi Verma in New Delhi; editing by Barbara Lewis)