Asian refiners remain confident Iran-Israel conflict will not disrupt Persian Gulf-Asia crude flows

Asian refiners remain unfazed by escalating geopolitical tensions in the Middle East, with many key buyers of Persian Gulf sour crudes confident that trade flows between the Persian Gulf and Asia will not be disrupted, as Iran and Israel are likely to prefer keeping East Asia neutral in their conflict, refinery feedstock managers, analysts and traders across Asia said Oct. 2.

Asian refiners have long been growing numb to the geopolitical tensions in the Middle East, as the Iran-Israel conflict has hardly resulted in any crude supply shortfalls or disruptions in Asia.

While supply security from the Persian Gulf is crucial, many Asian refiners broadly believe that the escalating conflict between Iran and Israel will not harm Persian Gulf-Asia oil flows, considering East Asia's largely neutral geopolitical stance, according to feedstock management and trading sources at refiners in Thailand, South Korea, Taiwan, Japan and China.

Iran has threatened to retaliate by attacking key Middle East energy infrastructure if the US or its allies engage militarily in its conflict with Israel, the country's military said in a statement aired on state television Oct. 1.

However, it is highly unlikely that Israel and Iran will escalate tensions to the point of causing any significant disruptions to Middle Eastern crude supplies to the Far East, as such actions could jeopardize Asia's geopolitical neutrality and draw major Asian military powers into the picture, according to the feedstock managers and traders.

"Asia's top four crude importers [China, India, South Korea and Japan] are also [the region's] four biggest economies, and they are all in the top 10 global military and naval power ranks, too ... [This is] something that Iran and Israel [are likely] well aware of," said a crude and condensate market analyst at a Singapore-based integrated Japanese trading company.

Middle Eastern sour crudes remain essential staples for East Asia's refining industry. Diplomatic and military-level interventions from East Asia would be inevitable if the region's economy is seriously threatened in the event of significant disruptions in oil supplies and trade flows, according to refinery feedstock managers in China, South Korea and Japan.

"If China ever faces any serious oil import flow disruption, I highly doubt Beijing will just sit and do nothing ... Very tough measures will be taken, such as military actions," said a trading and inventory manager at a state-run Chinese refiner.

Although China's crude imports from Saudi Arabia have declined so far this year due to refiners' strong preference for cheaper Russian and Iranian barrels -- often disguised as "Malaysia-origin" cargoes -- Asia's top crude buyer continues to rely on the Middle East for more than half of its overseas crude procurement.

The market share of Middle Eastern crude in China's total import basket remained at 54% for the January-August period, the latest data from the General Administration of Customs showed.

"East Asian nations are mostly very neutral in terms of where they stand in the ongoing Israel-Iran tensions ... Neither Tel Aviv nor Tehran would dare take any extreme actions that may cause major sour crude trade flow disruptions to the Far East, as such an instance could unnecessarily bring Asia's military involvement into the equation," a feedstock manager at a major South Korean refiner based in Ulsan said.

South Korea -- Asia's third-largest crude importer -- took in 493.12 million barrels of Middle Eastern crude in the first eight months of the year, up 2.9% on the year, the latest data from state-run Korea National Oil Corp. showed.

Japan's Saudi crude lifting in Red Sea

While many international shipping operators and Asian refiners seeking to secure deliveries of west of Suez crude grades largely continue to avoid the Red Sea due to the risk of attacks from Yemen's Houthi rebels, Japanese refiner Taiyo Oil has indicated that it will continue to lift Saudi Arabian light sour crude from the Red Sea port of Yanbu.

Taiyo Oil typically loads Saudi Arab Super Light crude from Yanbu in the Red Sea and is the only buyer of the Saudi grade in Asia, a trading source at the company said.

Despite the high security risk, Taiyo Oil is wiling to take the chance by using "neutral flagged" ships to carry the light sour Saudi crude, Taiyo Oil President and CEO Takahiro Yamamoto said Sept. 9 at the Asia-Pacific Petroleum Conference 2024 organized by S&P Global Commodity Insights.

Although Taiyo Oil has diversified its light crude supply sources, particularly in Southeast Asia, and with its solid regional trading partner Petronas, it will not completely cease importing Saudi Super Light crude via the Red Sea maritime route, Yamamoto said.

Japan relies heavily on Middle Eastern crude, as the fourth-largest crude importer in Asia took in 2.19 million b/d from Persian Gulf suppliers in the first eight months of the year, accounting for more than 96% of its total crude imports during that period, the latest data from the Ministry of Economy, Trade and Industry showed.

Platts, part of Commodity Insights, assessed the spread between the front-month Platts cash Dubai and the same-month Dubai crude swaps at $1.5/b on Oct. 1, compared with an average spread of $2.02/b in September.

The spread is widely known as Dubai crude market structure and is understood to be a key component in the monthly official selling price calculations of major Middle Eastern producers.