Analysis: Chinese, S Korean refiners favor Iraq's Basrah crude despite upside risk in OSP

Singapore — The recent upswing in geopolitical tensions in Baghdad could set the tone for higher Iraqi crude official selling prices, but Chinese and South Korean refiners are unlikely to turn their backs on the Persian Gulf supplier as its flagship Basrah crude remains an important feedstock grade for the Asian end-users.

Asian traders are cautiously awaiting Iraq's State Oil Marketing Organization, or SOMO, to release its new round of monthly OSPs next week for Basrah Light and Basrah Heavy crude cargoes bound for Asia.

SOMO is expected to raise the OSP differential for Basrah Light crude for loading in February by about 20-50 cents/b from a premium of $2.10/b to the mean of Platts Oman/Dubai assessments set for January cargoes, according to traders at major Chinese, South Korean and Japanese refiners surveyed by S&P Global Platts.

The traders mostly cited the additional supply cuts announced by OPEC and non-OPEC producers which took effect January 1, as well as supply disruption risks triggered by military confrontation between the US and Iran-backed Iraqi militia as key reasons behind the higher price outlook.

However, the growing upside risk in Iraqi crude OSPs may not necessarily lead to any drastic decline in sales volume to Asian customers, with major buyers in China and South Korea maintaining their strong interest in Basrah Light and Basrah Heavy crudes.

ADMIRATION FOR BASRAH

Norinco Huajin and Hengli Petrochemical (Dalian) Refinery -- two of the major Chinese buyers of Iraqi crude -- will continue to take Basrah Light crude as long as the grade can be loaded, regardless of any price swing or changes in supply volumes, refinery officials told Platts.

"If the OSP for Basrah crude goes up, the price for other Middle Eastern grades will probably go up too anyway," said an official at Norinco Huajin.

The refiner currently holds a term supply contract to receive 10 million barrels of Basrah Light crude in 2020, while it also has options to take some spot cargoes from time to time, the official added.

Elsewhere, South Korean refiners also expressed their admiration for Basrah crude, indicating that the heavy sour grade would remain one of the country's top three refinery feedstock grades.

"Geopolitical risks and military tensions alone won't exactly push South Korean refiners to switch to other sources," a Korea Petroleum Association official based in Seoul said.

"Iraq is a crucial supplier and many of the country's refinery systems are designed to process heavy sour grades just like Basrah Light and Basrah Heavy," he added.

BASRAH - SOUTH KOREA'S FAVORITE?

South Korea imported 13.54 million barrels of Basrah Light and Basrah Heavy crude in November, more than double from 5.82 million barrels received in October and up 4.9% from the same period a year earlier, latest data from state-run Korea National Oil Corp. showed.

South Korean refiners paid an average of $61.10/b for the Iraqi crude imported in November, sharply lower than the $66.40/b average paid for crude oil imported from Saudi Arabia during the month and $65.32/b paid for cargoes from Kuwait, the KNOC data showed.

KNOC's import cost includes freight, insurance, tax and other administrative and port charges.

"Basrah is one of South Korea's favorite as it can come cheap in abundance ... Middle East tensions could raise outright oil derivative prices but Basrah spot differentials would remain competitive," said a trading desk manager at GS Caltex based in Seoul.

Crude oil futures spiked in Asia Friday on news that the US had killed General Qassim Soleimani, leader of the Iranian Revolutionary Guard's foreign wing, in a strike in Iraq.

At 12:18 pm Singapore time (0418 GMT), the front month March ICE Brent crude futures was $1.95/b (2.94%) higher from Thursday's settle at $68.20/b, while the NYMEX February light sweet crude contract was $1.72/b (2.81%) higher at $62.90/b.

--Avantika Ramesh, avantika.ramesh@spglobal.com

--Eesha Muneeb, eesha.muneeb@spglobal.com

--Analyst Daisy Xu, daisy.xu@spglobal.com

--Oceana Zhou, oceana.zhou@spglobal.com

--Edited by Aastha Agnihotri, newsdesk@spglobal.com