Asian buyers of Mediterranean crudes continue to favor Cape of Good Hope delivery route

Asian refiners that regularly purchase light sweet crude grades from the Mediterranean market continue to prefer the Cape of Good Hope delivery route over the Red Sea passage due to safety concerns, although high logistical costs are limiting arbitrage trade deals, according to refinery feedstock managers across North and Southeast Asia.

The Brent-Dubai benchmark price spread has narrowed sharply in recent weeks, while some light sweet Mediterranean crude grades like CPC Blend are being offered at discounts in the spot market. However, the long and costly Cape of Good Hope delivery route is somewhat canceling out the discounts, feedstock managers and traders based in Thailand, South Korea and Singapore said over March 12-13.

When asked about taking the risk of the shorter and less costly Red Sea route for Mediterranean crude cargo deliveries, feedstock managers and traders said that the Cape of Good Hope route remains the more prudent choice, as safety is the top priority.

In January, Iran-backed Houthi rebels said they would only target ships with strong links to Israel following the Gaza ceasefire deal between Israel and Hamas. Recently, they renewed their threats against Israeli shipping after Israel blocked humanitarian aid to Gaza, saying that ships with strong links to Israel would be targeted in regional waters.

An official and sources at South Korea's top refiner, SK Innovation, said there is no definitive guarantee that all tankers can safely navigate the Red Sea region for shipments to Asia. As a result, CPC Blend crude, like other Mediterranean grades, will still need to take the much longer route around the Cape of Good Hope, which is both inefficient and costly.

South Korea did not import any CPC Blend crude in January, the latest data from the state-run Korea National Oil Corp. showed. The third-largest crude importer in Asia purchased an average of 2 million barrels/month of the grade in 2024 and 3.2 million barrels/month in 2023.

Still, shipments from Algeria, mostly light sweet Saharan Blend crude, rose to 2 million barrels in January, from 1.05 million barrels the previous year, the data showed.

Arbitrage economics

A feedstock strategist at a state-run Thai refiner said that shipping insurance fees remain too high, especially for the Red Sea passage to the Far East, making recent spot market discounts on several Mediterranean grades, as well as the sharp downtrend in the Brent-Dubai price spread, somewhat meaningless.

Platts, part of S&P Global Commodity Insights, assessed the Brent/Dubai exchange of futures for swaps at an average of 51.6 cents/b so far in March, down from February's average of 63.3 cents/b and January's average of $1.50/b. A weaker EFS generally makes various sweet crude grades, including those from the Mediterranean market, more economical compared with Dubai-linked Middle Eastern sour grades.

However, the insurance premium for merchant ships passing through the Red Sea remains firm despite a reduction in adverse incidents and is likely to stay that way for a long time, according to sources based in Seoul, Tokyo and Singapore.

The additional war risk premium (AWRP) in the Red Sea is currently around 0.5% of the hull and machinery (H&M) value of tankers for seven days and has not seen any major decline following the recent de-escalation in the Gaza war.

Taking into account the unfavorable shipping and logistical costs, Thailand did not receive any crude cargoes from the Mediterranean market in January, the latest customs data showed. In 2024, Thailand imported 17,615 b/d of light sweet Libyan crude and 7,994 b/d of Azerbaijan's Azeri Light crude.

Elsewhere, Indonesia's Pertamina, another regular Mediterranean crude buyer in Southeast Asia, has drastically slowed its purchases in recent months, particularly of Azeri Light crude, which previously regularly fed its Cilacap refinery.

Excluding light sweet Mediterranean grades, the state-run refiner was last heard to have purchased a cargo of Australia's North West Shelf condensate for April 4-8 loading from Chevron, along with various West African crude grades -- Angola's Clov, Nigeria's Qua Iboe and Gabon's Etame -- as well as Brazilian crude Sururu, through its recent tender that closed Feb. 10.

The NWS cargo was bought at a discount of around $3/b to Platts April Dated Brent crude assessments, FOB, which equals above parity with Platts Dated Brent on a CFR Tuban basis, according to market sources.