South Korea, Japan trade sources see OPEC+ more likely to extend crude production cuts

More than half of the refining industry participants in South Korea and Japan surveyed by S&P Global Commodity Insights over Feb. 22-28 said they expect OPEC and its alliance members to extend crude production cuts beyond April, but supply security remains firmly intact for Asia's third and fourth biggest crude importing nations.

With just little over a month left on scheduled OPEC+ voluntary production cuts of 2.2 million b/d, the Joint Ministerial Monitoring Committee, co-chaired by Saudi Arabia and Russia, has yet to confirm whether the group will extend the supply reduction stance beyond April.

The latest S&P Global survey of 11 traders, refinery feedstock managers and industry analysts in South Korea and Japan showed 55% of participants expect OPEC+ to extend production cuts. Three participants said they expect the producer group to conclude the output reductions at the end of March as initially planned, while two participants believed that chances are evenly 50-50.

"Middle Eastern producers are obsessed with three-digit oil prices and current price levels are not exactly in their favor... I wouldn't be surprised at all if OPEC and its partners continue with the production cuts at least through the second quarter," said a senior market analyst at Korea Petroleum Association based in Seoul.

Global economy is far from thriving and major OPEC members wouldn't want to see inventory levels surge, especially in times of record US production. Saudi Arabia and other Middle Eastern OPEC members would aim to at least find a solid oil price floor at around $80/b, according to feedstock managers at two South Korean refiners and one Japanese refiner.

S&P Global also forecast OPEC+ to extend the cuts beyond April 1 and the extensions could be announced by early March. "OPEC+ will be keen to preserve the recent price rebound, bridge the gap to seasonal strength in Q3 2024, and maintain a balanced oil market in 2024," said Paul Sheldon, chief geopolitical advisor for S&P Global.

Still, there is also a strong possibility that OPEC+ may decide to put an end to the production cuts as Middle Eastern producers may need to consider protecting their important market share in the Far East, with India and China heavily favoring Russian crude and East Asian traders increasing their US crude purchases, according to a feedstock manager at Hanwha TotalEnergies and a market strategist at a Japanese integrated trading company.

Supply security intact

Regardless of the OPEC+ decision on production cuts, refinery feedstock managers in South Korea and Japan indicated that supply security is hardly a concern as India is widely expected to continue actively purchasing Russian barrels and leave ample Middle East barrels for other Asian buyers to take, while increasing number of the US cargoes are being offered to the Far East.

"OPEC+ cuts never once led to any abrupt reductions in our [Middle Eastern] term contractual volumes... we fully appreciate and highly value major Middle East producers' supply commitments towards their Asian business and trading partners," said a feedstock manager at a South Korean refiner based in Ulsan.

South Korea's crude imports from its top supplier Saudi Arabia rose 1% year on year to 29.02 million in January, while UAE crude imports almost doubled from a year earlier, the latest data from the state-run Korea National Oil Corp. showed.

Shipments from the UAE last month, mostly light sour Murban and medium sour Upper Zakum, surged 99.2% year on year to 11.46 million barrels and marked the fifth consecutive month of year-on-year increase, KNOC data showed.

As for Japan, industry and refinery sources indicated that the country would face little issue securing staple Middle Eastern sour crude and the country will likely depend on Persian Gulf suppliers for at least 90% of the total refinery feedstock requirements in 2024.

"There is a call for diversification efforts but given the long history of solid Middle East-Japan economic partnership, the trend will be hard to break and supply security is never in doubt," a feedstock and logistics manager at a Japanese refiner said.

Japan's Ministry of Economy, Trade and Industry is expected to release detailed oil trade data for January, including major crude suppliers and specific crude grades on Feb. 29.

US crude buying spree

South Korean refiners could also afford to largely shrug off major OPEC+ production cut decisions over the past two years thanks to a strong trade network with the US suppliers and trading firms, industry sources said.

"US provides that cushion because it is the rare non-OPEC producer capable of supplying as much as 20 million barrels per month for us," a feedstock manager at a South Korean refiner said.

South Korea picked up 14.21 million barrels, or more than seven VLCCs, from the North American supplier in January, KNOC data showed. Asia's biggest US crude buyer purchased 142.38 million barrels in 2023, up 4.4% from 2022.

Among recent spot trades concluded in the Asia-Pacific market, South Korea's Hyundai Oilbank was reported to have purchased 2 million barrels of WTI Midland crude for May delivery, while Japan's Taiyo Oil was heard to have bought a similar-sized cargo from Occidental at a premium of $3.2/b to Platts Dated Brent.

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

Source: Korea National Oil Corp.