South Korea's reliance on Saudi crude on track to reach 18-year high in 2023

South Korea is increasingly relying on Saudi crude oil, with the world's fourth biggest crude importer taking more than a third of its total refinery feedstock purchases from the OPEC kingpin, as local refiners completely shun Russian oil, while many non-Middle Eastern crude producers focus on supplying Europe.

South Korea received 27.96 million barrels of crude from Saudi Arabia in February, up 10.4% from a year earlier, latest data from state-run Korea National Oil Corp showed. In the first two months, South Korea took 56.68 million barrels of Saudi crude, making up 33.6% of the country's total refinery feedstock imports during the period, S&P Global Commodity Insights' import source market share calculation showed.

At this rate, taking into consideration the government's growing efforts to strengthen Seoul-Riyadh diplomatic and economic ties, South Korea is on course to set the highest annual Saudi crude import share since 36.3% in 1995, according to feedstock managers at two major South Korean refiners and industry analysts based in Seoul and Ulsan.

South Korea has put the brakes on crude import diversification efforts in the past 2-3 years as G7 rolled out wide-ranging sanctions against Russian oil trades, while major producers in the Americas and Africa are sending more cargoes to European end-users, a senior market research analyst at Korea Petroleum Association said.

"The government and the refining industry seem keen to significantly enhance supply security through Middle Eastern suppliers, especially Saudi Arabia ... South Korea would depend heavily on Persian Gulf supplies, as well as US crude to some extent, throughout the year," a feedstock logistics and trading management source at a major South Korean refiner said.

Senior officials at key South Korean government ministries including the Ministry of Trade, Industry and Energy and the Ministry of Economy and Finance visited Riyadh in February to resume free trade agreement negotiations with representatives from Gulf Cooperation Council member nations, marking the seventh round of official FTA discussions between the two parties.

In addition, South Korea's third biggest refiner S-Oil held a ground-breaking launch ceremony March 9 for the country's biggest ever petrochemical project, which was funded by Aramco Overseas, a subsidiary of Saudi Aramco.

India and China are aggressively and actively taking Russian crude and this is not making major Middle Eastern producers comfortable as it is in their best interest to protect their Asian market share, the KPA analyst said.

Apart from Saudi Arabia, South Korea's crude imports from another major Persian Gulf supplier UAE jumped to 10.95 million barrels in February, almost a fivefold increase from 2.34 million barrels received a year earlier, the KNOC data showed. The February shipments from the UAE were mostly Murban and Upper Zakum crude, refinery sources with direct knowledge of the matter told S&P Global.

South Korea and the UAE have also tightened energy cooperation. KNOC recently received 2 million barrels of UAE crude, with another batch of Abu Dhabi crude expected to arrive in the coming days, as the two nations launched a joint storage project.

No more Russian crude, less US shipments

South Korea's refining industry is on track to register zero Russian crude imports in the first quarter and for the entire year as refiners have cut off their ties with the non-OPEC producer, market participants said.

South Korea received no crude cargo from Russia in February, marking the third straight month of the trade cut off, the KNOC data showed. In 2022, shipments of Russian crude tumbled 61% year on year to 20.98 million barrels.

Regardless of the $60/b price cap set by the G7, South Korean refiners preferred to avoid trade, logistical, legal, and financial complications and maintain a good corporate reputation, S&P Global reported previously, citing officials and feedstock managers at four major refiners.

Elsewhere, crude imports from the US in February declined 8.6% from a year earlier to 11.16 million barrels, marking the second consecutive month of year-on-year decline. South Korea received no cargoes of Forties crude from the UK for the fifth straight month in February.

Tepid domestic fuel demand outlook

In total, South Korea imported 87.16 million barrels, or 3.11 million b/d, of crude in February, up 9.9% from 79.284 million barrels a year earlier, driven by the downtrend in outright benchmark prices, while state-run KNOC and major private-sector importers look to replenish their inventories, S&P Global reported previously.

However, crude oil imports and requirements would be limited over the next few months as the refining industry conduct spring maintenance, while run rates and throughput levels are under pressure amid dismal economic activity and tepid consumer confidence, middle distillate marketers at two major refiners said.

Transportation fuel demand is very weak as high inflation and weak currency continue to batter consumer spending, while the outlook for industrial fuel demand also looks cloudy as the country's manufacturing, financial and construction sectors are all struggling, the middle distillate marketers and traders based in Seoul and Singapore added.

For the first two months, South Korea imported 168.796 million barrels of crude, down 3% from 174.076 million barrels in the same period last year.

South Korea's top 10 crude suppliers (Unit: '000 barrels)

Source: Korea National Oil Corp.