South Korea pays less for US crude than Saudi Arabian barrels for 2nd straight month

South Korea reduced imports of Saudi Arabian crude and boosted shipments of US cargoes for the second straight month in March because of more attractive feedstock trading economics for American barrels, as Persian Gulf-Asia tanker insurance costs rose in the wake of geopolitical tensions in the Middle East, industry sources said over April 24-26.

Asia's third biggest crude importer took 28.061 million barrels from Saudi Arabia in March, down 12.3% from a year earlier, while US imports, mostly light sweet grades including WTI Midland, rose 17.6% year on year to 12.26 million barrels, latest data from state-run Korea National Oil Corp. showed.

South Korea's major refiners, including SK Innovation and Hyundai Oilbank, declined to comment when asked about their first-half 2024 Saudi Arabian crude term supply contracts and their typical monthly term lifting nomination range, but the companies indicated that shipments have declined in recent months as Saudi Aramco's crude official selling prices have generally been expensive so far this year and Persian Gulf-Asia logistical costs have increased.

Refiners paid on average $85.25/b for Saudi Arabian crude shipments in March, $1.55/b more than the monthly average of $83.7/b paid for US volumes received in the same month, KNOC data showed. KNOC's import cost data includes freight, insurance, tax and other administrative and port charges.

Lighter and sweeter crude grades including US WTI Midland should typically cost more than high sulfur Saudi Arabian grades purely in terms of quality. Accordingly, refiners paid on average $92.44/b for US crude shipments in the fourth quarter 2023, compared with $90.46/b for shipments from Saudi Arabia over the same period.

However, the import cost comparison flipped from February as US crude became $1.76/b cheaper than Saudi Arabian barrels in the month.

"As the OPEC+ extended their tight production strategy into 2024, Saudi Aramco has been posting [its crude] OSPs above Platts Dubai market structure on a few occasions," said a feedstock management source at a major South Korean refiner. Platts is part of S&P Global Commodity Insights.

Escalating tensions in the Middle East amid the Israel-Iran conflict, as well as the ongoing concerns over maritime safety in the Red Sea and its surrounding region are adding to logistical costs for bringing in Middle Eastern sour crude cargoes, refinery feedstock managers based in Seoul said.

"[Persian Gulf-Asia] VLCC availability is good actually, but insurance fees and other security-related costs have surged, adding to the overall cost of delivery," a feedstock and logistics manager at another South Korean refiner based in Ulsan said.

Additional war risk premium in the Red Sea has been 0.5%-1.0% of the value of the hull and machinery of a ship varying with age and size, compared with 0.0001% in the Persian Gulf and it's the latter's turn to rise significantly, S&P Global reported earlier, citing various shipping sources.

Meanwhile, refinery and trading sources highlighted that higher quality and a longer voyage duration for US crude should cost at least $2/b more than high sulfur Middle Eastern sour crude, but South Korea's free trade agreement with the US provides huge advantage over other Asian buyers when competing for WTI Midland spot cargoes.

The South Korea-US FTA allows cost cuts of as much as $2/b for purchasing WTI Midland crude, a trading source at a South Korean refiner's feedstock procurement team based in Singapore told S&P Global previously.

CPC Blend logistical hassle

Logistical hassle has also continued to restrict South Korea's CPC Blend crude procurement with shipments of the light sweet Kazakh grade falling 62.7% year on year to 2.139 million barrels in March.

Logistics for bringing in CPC Blend have become complicated as there are significantly fewer vessels willing to travel the Red Sea area, according to feedstock managers at two major South Korean refiners.

CPC Blend crude first gets delivered from production facilities to the Russian Black Sea port of Novorossiisk via the Tengiz-Black Sea pipeline before sailing through the Suez Canal to reach South Korean ports.

Since late 2023, CPC Blend crude cargoes for South Korea have detoured the Suez Canal to take the longer Cape of Good Hope route, according to refinery sources with direct knowledge of the matter.

"Economics for cracking the light sweet Kazakh crude are getting worse and worse because of the significantly higher delivery and logistics-related costs," the feedstock manager at the second South Korean refiner said.

Reflecting Asia's faltering interest in Mediterranean grades, Platts assessed CPC Blend on a CIF Augusta basis at an average discount of $3.03/b to the Dated Brent strip to date in H1 2024, compared with an average discount of $1.30/b in H2 2023.

South Korea's top 10 crude suppliers in March (unit: '000 barrels)

*Includes other suppliers

Source: Korea National Oil Corp