South Korea-Malaysia FTA talks ignite hopes for lower crude, naphtha, gasoline trade costs

South Korean and Malaysian oil traders and marketers are hopeful that a successful outcome of the Free Trade Agreement talks between Seoul and Kuala Lumpur could boost crude and oil product trades between the North and Southeast Asian nations, as well as sharply lowering the oil import and export costs, industry sources said over April 2-5.

South Korea and Malaysia have officially resumed bilateral FTA negotiations, which have been on pause since 2019, a representative at Korea Trade-Investment Promotion Agency, or KOTRA, and a PR assistant manager at the Ministry of Trade, Industry and Energy, told S&P Global Commodity Insights.

South Korea's Minister Inkyo Cheong met with Tengku Zafrul Aziz, Malaysia's Minister of Investment, Trade and Industry (MITI), on March 26 in Kuala Lumpur for trade ministerial talks and FTA discussions, MOTIE said.

"The declaration [for resumption of FTA negotiations] comes four years and six months after the third official negotiating round held in September 2019, and the two sides agreed to establish working groups for service, investment, digital, green, and bio in addition to those that had already been in progress, with aim to push for a more comprehensive FTA," South Korea's trade ministry said.

Refinery feedstock managers and crude oil trading sources in South Korea indicated this week that a positive FTA negotiation talks would lead to a significant cost savings for any Malaysian spot crude cargo purchases in the future as Malaysian crudes are among the most expensive light sweet grades in the world.

South Korean refiners and petrochemical makers used to purchase on average more than 10 million barrels/year of light and ultra-light crude oil including Muda condensate, Kidurong, Labuan and Cakerawala condensate from Malaysia. The trade flows drastically turned lower over the past couple of decades with shipments of Malaysian crude and condensate averaging just 3,890 b/d in 2023, data from state-run Korea National Oil Corp. showed.

Many small- to medium-sized trading houses have never done spot Malaysian crude deals with South Korean end-users before but the successful outcome of the FTA could open the doors for a much wider trading network for suppliers and end-users in both sides, said low sulfur crude trader at an Asian trading house operating in Kuala Lumpur who handles various light sweet Malaysian crude grades.

"FTAs make a world of difference in terms of crude trading economics and refiners can get huge advantage when competing for various crude grades in the regional and global spot market," said a feedstock and inventory manager at Hanwha TotalEnergies.

The South Korea-US FTA for one, 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 said.

In addition, South Korean petrochemical makers were hopeful that naphtha imports from Malaysia could become much cheaper if the FTA deal is reached as Malaysian port charges, taxes and fees are expensive compared costs in other Southeast Asian and Oceania ports.

Despite the close proximity, South Korean refiners and petrochemical makers paid on average $79.31/b for naphtha imported from Malaysia in February, higher than the average $76.08/b paid for naphtha purchased from the UAE and $79.21/b paid for Kuwaiti barrels in the same month, data from state-run Korea National Oil Corp. showed.

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

MOTIE said Minister Cheong also held a conference with South Korean companies operating in Malaysia last month to discuss measures for resolving issues concerning customs challenges.

Oil product trades

Apart from crude oil, light and middle distillate trade flows could also flourish if South Korea and Malaysia can successfully tie up the FTA deal as many administrative hurdles and tax-related hurdles could be bypassed for naphtha, gasoline and diesel shipments between the two sides, refinery and trade sources said.

South Korea exported 4.8 million barrels of oil products, mostly gasoline and diesel, to Malaysia in the first two months, up 23% from 3.9 million barrels sold in the same period a year earlier, KNOC data showed.

Meanwhile, naphtha shipments from Malaysia to South Korea over January-February rose 25% on the year to 1.58 million barrels.

Apart from the crude and oil product trades, South Korean refiners, petrochemical makers and upstream companies that use storage facilities in Malaysia could also benefit from lower taxes and fees if Seoul and Kuala Lumpur manage to seal the FTA agreement.

Among ASEAN countries, Malaysia is South Korea's third- and fourth-largest partner in terms of trade and investment, respectively. In view of the two countries' mutually supplementary trade structure comprising natural gas, petroleum products, semiconductors, and fine chemicals, it is anticipated that the FTA will bolster South Korea's trade and investment base in ASEAN, the ministry said.