South Korea aims to maximize US crude intake to minimize feedstock cost burden

South Korea's crude imports from the US jumped 40.5% from a year earlier in February and local refiners aim to take as much light sweet crude cargoes from the US as possible as they continue to favor competitive US barrels in times of surging benchmark oil prices, industry sources and market analysts based in Seoul said March 31.

Major South Korean refiners and petrochemical companies including SK Innovation, Hanwha Total, GS Caltex and Hyundai Oilbank imported a combined 12.21 million barrels of US crude last month, up from 8.69 million barrels a year earlier, and marking the eleventh consecutive month of year-on-year increase, data from state-run Korea National Oil Corp. showed.

In times of surging global energy prices and rising oil import bills, traders prefer to maximize the proportion of US crude in their monthly feedstock procurement baskets as light sweet US grades come at a much lower cost than Middle Eastern oil, feedstock managers at two South Korean refiners told S&P Global Commodity Insights.

South Korean refiners hold a big advantage over other Asian end-users when it comes to US crude trades due to the US-South Korea free trade agreement, while Middle Eastern producers have been consistently raising their official selling prices over the recent trading cycles.

South Korean refiners paid on average $90.11/b for shipments of US grades, mostly light sweet grades, in February, lower than $92.07/b for Saudi grades and $94.19/b for Kuwaiti barrels, mostly heavy sour, according to KNOC officials. KNOC's import costs include freight, insurance, tax and other administrative and port charges.

Over January-February, South Korea's imports of US grades nearly doubled to 27.3 million barrels from 14.12 million barrels in the same period a year earlier.

Local refiners are expected to maintain their strong appetite for US crude to better manage their overall refining margins, the KNOC official said. The majority of US crudes that South Korean refiners purchase are light sweet grades rich in middle distillate yield, including WTI and Eagle Ford.

The South Korean refining sector cheered latest media reports that US President Joe Biden is considering releasing 1 million b/d of oil from the US' strategic petroleum reserves over several months, with the total volume possibly reaching as high as 180 million barrels.

Previous SPR releases from the US, as well as other top Asian oil consuming nations, were miniscule in terms of market impact as the release volumes were less than Asia's daily spot cargo purchases, according to market research analysts at Korea Petroleum Association and the feedstock managers at two refiners.

However, a grand-scale US SPR release would make a difference in the market and South Korea would closely monitor whether additional US supplies would be available for international buyers, the KPA analysts and the refinery sources said.

Middle Eastern, Russian crude

South Korean refiners, as well as other major end-users across Asia, continued to call for OPEC+ to raise supply by at least 800,000 b/d as surging prices would continue to propel inflationary pressure and eventually derail global economic growth, the latest S&P Global market survey showed.

"Outright prices are extremely high but Asian buyers are also paying premiums on top of that for Middle Eastern crude... those OPEC producers with spare capacity should significantly boost their output because if the global economy suffers from high prices, that will also hurt them in the end," a crude and condensate trader at Hanwha Total said.

For April-loading cargoes bound for Asia, Saudi Aramco raised its Arab Light crude OSP differential by $2.15/b to a $4.95/b premium over the average of Platts Dubai and DME Oman.

Saudi Arabia and UAE have a fair bit of spare capacity, hence Asia is hoping for them to step up, according to analysts at Kiwoom Securities and Hanwha Investment & Securities based in Seoul.

South Korea received 25.33 million barrels of crude from its top supplier Saudi Arabia in February, up 4.8% from a year earlier, the KNOC data showed. Crude imports from Kuwait surged 35.5% year on year to 10.797 million barrels in the month.

Crude imports from Russia fell 30.4% month on month to 3.647 million barrels in February, a seven-month low.

Far East Russian crude cargoes are expected to continue to arrive throughout April and May as spot cargoes for loading in forward months had already been purchased prior to western sanctions on Moscow.

Feedstock managers at multiple Northeast Asian and Southeast Asian refiners told S&P Global that they were increasingly tempted to pick up Russian crude cargoes after Indian state-run refiners bought Russian Urals crude at steep discounts.

South Korean refiners indicated that they could still purchase Far East Russian crudes such as ESPO and Sokol as Seoul has not officially banned any energy imports from Russia, but the companies see plenty of trade hurdles ahead, while they also aim to maintain good corporate reputations.

South Korea's top 10 crude suppliers:

(Unit: '000 barrels)

*Total includes other suppliers

Source: Korea National Oil Corp.