South Korean refiners fret over rising crude settlement costs as Yoon's insurrection pressures local currency

South Korean refiners are closely monitoring the won's recent sharp decline against the dollar as crude oil settlement costs overshoot their initial feedstock procurement spending estimates with the local currency hovering at a multiyear low amid domestic political conflict.

South Korea's four major refiners -- SK Innovation, GS Caltex, S-Oil and Hyundai Oilbank -- are highly sensitive to the dollar-won exchange rate as Asia's third biggest crude importing nation relies on imports for almost all of its crude requirements. Foreign fund repatriation accelerated after President Yoon Suk-yeol declared martial law on Dec. 3. The South Korean won remains under pressure despite the impeachment bill passed on Dec. 14, as Yoon and the ruling party's resistance to arrest and investigation regarding the coup attempt undermines investor confidence, according to refining industry and financial market participants.

Refiners are receiving spot Middle Eastern sour crude cargoes loaded in November this week. The spot deals were mostly made much earlier during the September trading cycle when the dollar-won exchange rate was more favorable. Feedstock managers at two major South Korean refiners say the final spot cargo bill settlements will be made once quality checks, logistics and all administrative paperwork are completed in the coming weeks.

"We have our own oil derivatives and currency hedging team, but the sharp and abrupt decline in the won came as a big surprise, as the recent series of political events were unforeseen," said a senior feedstock manager at a major South Korean refiner.

For every Won 10 increase in the dollar-won exchange rate, refiners generally could post forex-related losses of anywhere between $5 million to $10 million, according to feedstock management and trading sources with knowledge of the matter based in Seoul and Singapore.

According to Bank of Korea data, the dollar-won exchange rate was quoted at Won 1,436.26 during the afternoon Seoul trading session on Dec. 16, compared to Won 1403.96 at the start of the month.

The latest data from state-run Korea National Oil Corp. showed that South Korea imported 865.33 million barrels of crude from January to October, and refiners paid an average of $83.96/b in the first 10 months. KNOC's import cost data includes freight, insurance, tax and other administrative and port charges.

Platts, part of S&P Global Commodity Insights, assessed physical Middle Eastern sour crude benchmark Cash Dubai at $73.46/b on Dec. 13.

Political and financial market stability

South Korea's petroleum refining and trading fundamentals remain firmly intact as the domestic political conflict is completely a separate matter to industrial and corporate business activities, traders, feedstock managers, refinery officials and executives said.

Although millions of South Korean citizens gather daily to demand Yoon's arrest and a prompt criminal investigation of all those allegedly involved in the Dec. 3 martial law decree, the protests have been peaceful and orderly, causing little to no damage to private businesses and public infrastructure. Refiners continue to receive and buy crude as usual and fulfill oil product supply contracts to various customers in Asia and Oceania, according to middle distillate marketers and trading managers at South Korean refiners and petrochemical companies.

Still, volatile currency bodes ill for the overall refining margin, and the industry is hoping for a rapid and smooth establishment of a new government leadership structure, trade participants and refinery sources said.

The National Assembly successfully passed a bill to impeach Yoon on Dec. 14, while several top military personnel and Yoon's cabinet staff have been arrested on insurrection charges.

However, investor confidence in South Korean financial markets remains fragile, as many top government officials, including acting President Han Duck-Soo and several ruling party lawmakers, are still under investigation or pending arrest for allegedly participating in what is now widely defined as the "unconstitutional" martial law decree on Dec. 13.

Additionally, Yoon failed to appear for questioning by prosecutors, and his office opposed the joint special investigation team's attempt to seize documents related to his martial law decree. The special investigation team comprises the Corruption Investigation Office for High-ranking Officials (CIO), the National Office of Investigation (NOI) and the defense ministry's investigation headquarters.