South Korea capitalizes on narrow Brent-Dubai spread, buys 7 VLCCs of US crude in Oct

South Korea's crude oil imports in October rose 4.4% from a year earlier with refiners taking full advantage of narrow Brent-Dubai price spread to bring in around 7 VLCCs of US crude in the month, while traders also remained confident over Middle Eastern sour crude supply security for winter and 2024, industry sources said over Nov. 17-22 based on the latest customs data.

The world's fourth-biggest crude importer received 83 million barrels, or 2.68 million b/d, of crude oil last month, compared with 79.53 million barrels received a year earlier, data from the Korea Customs Service showed.

Shipments from the US in October, mostly light sweet grades, rose 15.1% on the year to 14.96 million barrels, marking the highest monthly imports from the North American producer since 15.09 million barrels in January 2022, according to S&P Global Commodity Insights' observation based on historic data from both the customs service and state-run Korea National Oil Corp.

Throughout the third quarter, the narrow Brent-Dubai price spread paved the way for more sweet crude purchases for Q4 delivery as it helped improved the overall refining economics, while Middle Eastern sour crude official selling prices were on the rise, feedstock management sources at two major South Korean refiners said.

South Korean refiners have extensive trading network all over the world, allowing them to take advantage of every arbitrage trading opportunities, while strengthening their supply security in times of prolonged OPEC+ production cuts, said a market research analyst at Korea Petroleum Association based in Seoul.

Sweet, sour crude balance

The Brent/Dubai Exchange of Futures for Swaps, or EFS spread, a key indicator of Brent's premium to the Middle Eastern benchmark, has averaged 99 cents/b in Q3, marking the narrowest quarterly spread since 48 cents/b in Q4 2020, S&P Global data showed.

A weaker EFS makes various sweet crude grades produced in the Americas, North Sea and Africa that are linked to the European benchmark more economical compared with Dubai-linked grades.

Meanwhile, South Korea's crude imports from top supplier Saudi Arabia, excluding shipments from the Saudi-Kuwaiti Neutral Zone, fell 12.3% on the year to 24.24 million barrels in October, but refinery sources indicated that the reduction was not related to the OPEC kingpin's production cut commitments.

"We sometimes request to lift only the very minimum term contractual volume ... it has nothing to do with Saudi Arabia's production cut commitments," a feedstock manager at a major South Korean refiner told S&P Global. "We hardly worry about Middle Eastern sour crude supply security."

OPEC and its alliance has been maintaining a firm stance to control and limit the group's crude production levels, but major Middle Eastern producers are respecting East Asian customers' demand and requirements, with Saudi Aramco and ADNOC consistently fulfilling monthly term supply (opens in a new tab)contracts for the buyers, S&P Global reported previously, citing various trading sources at South Korean, as well as Thai, Japanese, Taiwanese and Chinese refiners.

In terms of trading and refining economics, refiners strive to find the perfect balance between spot and term purchases, as well as sweet and sour crude intake, according to feedstock managers at two South Korean refiners, indicating that there's scope for more active US crude purchases as the Brent-Dubai EFS remains narrow, while Middle Eastern sour crude OSPs remain rather expensive.

Platts, part of S&P Global, assessed the EFS spread at minus 2 cents/b Nov. 20.

Winter fuel demand, margins

Major South Korean refiners are planning to lift their average run rates in Q4 and early 2024 as margins are expected to hold at healthy levels.

Regional refining margins are projected to remain solid thanks to winter seasonal demand increase, low global inventories and limited supply outlook, an official at S-Oil Corp. said.

South Korea's fourth largest refiner Hyundai Oilbank indicated that gasoline cracks are expected to turn strong in the first half of next year driven by stockpiling demand, while middle distillate cracks are forecast to stay strong on the back of reduced Russian supply and strong jet fuel demand amid stellar increase in international passenger flights.

The country's top refiner SK Innovation also indicated recently that it may slowly raise crude throughput in Q4 as refining, sales and export margins are forecast to stay strong.

Asian crack spreads improved significantly since Q2 and margins should hold at reasonably healthy levels heading into peak winter season, with stockpiling requirements, improvement in Chinese demand, year-end holidays and winter power consumption expected to support the gasoil and jet fuel/kerosene complex, S&P Global reported previously, citing middle distillate marketers based in Seoul and Singapore.

KNOC is expected to release detailed oil trade data for October, including shipments from other major crude suppliers, import costs and stockpiles, after Nov. 27.